Why Barclays Decided to Change Its Forecast for Fed Cuts

Show Transcript
Bloomberg Jul 14 23:40 · 5226 Views

Barclays Chief US Economist Marc Giannoni explains why the firm decided to change its forecast for Federal Reserve monetary policy, predicting a second interest-rate cut in December in addition to the one they were already expecting likely in September. He speaks on "Bloomberg The Close."

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

  • 00:00 Give us a sense here as to why you think the Fed will feel compelled not only to cut once, but to do it again before we get
  • 00:07 to 2025.
  • 00:10 Yes.
  • 00:10 Good afternoon.
  • 00:10 Thanks for for having me.
  • 00:12 Well, look,
  • 00:13 we got
  • 00:14 very good.
  • 00:15 CPI data yesterday
  • 00:17 as well as some producer price data.
  • 00:20 This morning that suggested inflation
  • 00:22 in June actually moderated more than expected.
  • 00:26 We think this is going to help the Fed
  • 00:29 gain more confidence that in fact,
  • 00:32 inflation is on its way back to the 2%.
  • 00:35 Target.
  • 00:36 So we think that
  • 00:38 with that increased confidence and this is amid also a labor market that shows some moderation, that shows
  • 00:47 some slight cooling as well
  • 00:49 we think.
  • 00:50 And that with that, the Fed is going to be confident that they are on track, in fact, for inflation to go back to 2%
  • 00:56 and that allows them to
  • 00:58 start cutting rates in September,
  • 01:00 but then to continue with this rate cutting cycle in December as well.
  • 01:04 So we added one cut to our call.
  • 01:07 As you pointed out, this gets to a kind of a core question that I think has been bounced around for a while.
  • 01:11 And I know Powell has been asked about this and that is whether or not financial conditions are indeed restrictive.
  • 01:17 He was asked that question in the past and said he didn't think they were necessarily restrictive enough here
  • 01:22 to justify two rate cuts in the span of basically what would be about three to four months.
  • 01:26 You would have to assume
  • 01:28 that their stance on the restrictiveness has changed.
  • 01:32 Yes, that's right.
  • 01:33 So that's a very tricky question.
  • 01:35 So if you if you look at the policy rates where they are compared to history,
  • 01:40 I mean, they look pretty elevated.
  • 01:42 And I think the the Fed Fed official.
  • 01:45 Have repeated over and over again that they thought that policy was quite restrictive.
  • 01:50 And in fact, Chair Powell has repeated this
  • 01:53 quite a bit.
  • 01:54 The evidence for that
  • 01:57 is is very difficult to find, but.
  • 02:00 The the part that Chapel has alluded to is looking at labor demand.
  • 02:05 Like looking at job openings gradually coming down,
  • 02:09 signs of Labor demand, normalizing
  • 02:11 it it and I think there is there is truth to that.
  • 02:14 I mean the, the labor market as a whole is no longer
  • 02:17 as overheated as it was.
  • 02:19 It looks like now it's pretty much at full employment
  • 02:23 and
  • 02:24 and that that's important
  • 02:25 due to the elevated rates we've had.
  • 02:27 Now the issue though, is if you look at broader financial conditions, it becomes a little more tricky and you know, we.
  • 02:35 Track various measures of financial conditions and one that the Fed has has been emphasized.
  • 02:40 In particular, over the past year
  • 02:43 in technical term called FC IG measures that the the Fed staff has put together and we update on a very regular basis.
  • 02:51 And based on that, it doesn't look like Fed
  • 02:53 financial conditions are particularly tight.
  • 02:55 In fact,
  • 02:56 they are close to neutral, if not slightly easy as well.
  • 02:59 OK.
  • 03:00 You had mentioned that the PPI report was also encouraging.
  • 03:03 Can you explain how that is to me?
  • 03:05 Because when I look at the numbers, it looks like everything came in higher than anticipated, whether it's final demand month over month,
  • 03:11 final demand year over year, or core year over year.
  • 03:13 Everything came in higher than what economists expected except for the PPI X food, energy and trade month over month that was flat.
  • 03:21 If PPI is a leading indicator for CPI, wouldn't this
  • 03:25 hotter than expected PPI report suggest the opposite of what the CPI gave us?
  • 03:30 No, you're you're exactly right
  • 03:32 in describing what what happened to the PV.
  • 03:35 That we that we got for June
  • 03:37 earlier this morning,
  • 03:39 but.
  • 03:40 You know the way we look at it is we, we take first the CPI,
  • 03:46 so the consumer price index
  • 03:48 that we that got published.
  • 03:50 Yesterday and that that showed a very big surprise, I mean a surprise to the downside and more importantly a broad based
  • 03:57 weakening ending in inflation.
  • 04:01 Then
  • 04:02 what we look at is the feds.
  • 04:05 Favorite measure of inflation and that's the PCE inflation.
  • 04:08 So consumer price is.
  • 04:10 But measured slightly differently
  • 04:12 that the Fed thinks is more relevant to capture really the the inflation that's relevant for consumers.
  • 04:18 And that involves, I mean, one way to really gauge what these PC inflation is going to look like when we finally get that release at the end of the month
  • 04:28 is by looking at the important component of the CPI that we got yesterday as well as some components of the PPI that we got this morning.
  • 04:37 And when you put it all together,
  • 04:39 it
  • 04:40 looks like
  • 04:40 PCE inflation or core PCE inflation
  • 04:44 that the Fed is going to be focusing very much on
  • 04:47 is going to round around like a .17% for June in our own estimation.
  • 04:52 And that's involves some subcomponent of the PPI that that that came in this morning.
  • 04:57 Got it.
  • 04:58 OK.
  • 04:58 And of course, that core PC number comes in July 26th before the FOMC decision on July 31st.
  • 05:05 So walk me through how you see this September rate cut unfolding.
  • 05:08 Is the Fed going to start
  • 05:10 positioning for that at the July 31st meeting or do they hold off and
  • 05:14 pal starts dropping hints at Jackson Hole?
  • 05:19 So I think
  • 05:20 based on the recent inflation data
  • 05:23 and the,
  • 05:24 the PC inflation that we'll get
  • 05:27 later this month, as you pointed out,
  • 05:29 I think the, the Fed will say the in the FOMC statement of the July meeting, I think the Fed will say that
  • 05:37 they, they found
  • 05:39 the inflation data very encouraging.
  • 05:42 It's
  • 05:43 you know that they will.
  • 05:45 Also note
  • 05:46 potentially some increase in the unemployment rate.
  • 05:50 That we've observed in in recent months
  • 05:53 and with that.
  • 05:55 Set the stage for possible rate cut in in September,
  • 05:59 Then there will be another opportunity for Chair Powell to speak
  • 06:03 at the Jackson Hole.
  • 06:05 Conference in August
  • 06:06 so that by the time we get to September, the September.
  • 06:10 Meaning we expect the
  • 06:11 the market expectation to to really cement around the rent red cut
  • 06:17 in at the September meeting.
  • 06:18 So that won't come as a surprise by the time we get to the September meeting.