A Question Of When
May 3, 2024 -- It's a reasonable certainty that the next move for the federal funds rate will be a downward one, and at his post-FOMC meeting press conference, Fed Chair Powell pretty much ruled out any increase in rates, saying "I think it's unlikely that the next policy rate move will be a hike." He also added that "I would say that we believe [the current level of rates] is restrictive and we believe over time it will be sufficiently restrictive" to return inflation to the Fed's 2% core PCE target.
At the same time, it's a reasonable certainty that there will be no lowering of the federal funds rate come June, and likely not in July either. At present, futures markets peg the odds of a June cut at just under 14% (a number improved after Friday cooler employment report) but less than a 40% chance of a rate cut in July. These speculators have placed a 69% probability of at least one cut by the end of the September 18 meeting; however, a reduction at a date some four-and-a-half months into the future is no certainty. Moreover, it will require a more strongly positive inflation trend to have formed in the late spring and summer for this hope to be realized.
So even as the direction for rates is reasonably certain the timing of them being moved in that direction is not. If not September -- just before the presidential election, often a time when the Fed has preferred not to make policy adjustments -- then a November cut may be possible, as the scheduled meeting starts literally a day after Election Tuesday, but more likely we might be looking at December. It feels as though the cadence for rate cuts might be "If July, then December" but "if September, then January (or even March).
As to answering any question of when rates might be trimmed for the first time, "That will be a question that the data will have to answer," said Mr. Powell,
In his prepared remarks, Chair Powell said that "The labor market remains relatively tight, but supply and demand conditions have come into better balance." Of course, as it's the first week of the month and a month past the end of the first quarter, a fresh slew of data covering the labor markets became available this week, providing updated insight into what's happening with people and their jobs.
The Job Openings and Labor Turnover Survey (JOLTS) is a lagging review of conditions, as the latest available data covers March. The latest update found that the number job openings continue to slowly shrink; the 8.488 million openings in March is a number that is at about a three-year low, although still well above the pre-pandemic trend. The JOLTS report also noted that hiring has cooled; outside of the pandemic drop, the rate of hiring as tracked here has retreated to about January 2018 levels. Companies may not be searching for and hiring as many folks as they had been, but they also aren't shedding or losing workers as quickly either. Total separations settled further, and voluntary quits are at roughly six-year lows if the most severe pandemic distortions aren't considered.
There was a burst of layoff announcements during the first three months of 2024, but they appear to be fading again. Announced layoffs throttled back in April, according to the outplacement firm of Challenger, Gray and Christmas. The headcount reduction of 64,789 announced in April was 28% fewer than the March figure and also more than 3% below the same month last year. Of course, not all the announced layoffs happen right away and not all even take place here in the U.S. As well (and in general) even folks that do get laid off don't seem to be having all that much trouble finding new positions, since very few of them seem to be showing up on the unemployment rolls. Initial claims for unemployment assistance continue to simmer along at a very low rate, and the latest tally showed that only 208,000 applications for unemployment assistance were filed in the week ending April 27. Initial claims have been no higher than 228,000 and no lower than 194,000 in eight months, a remarkably steady string at about a 50-year low level.
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The employment report for April was out this week, and job growth did show an appreciable slowing from where it began this year. "Only" 175,000 new hires took place last month, the smallest increase six months, and one down from a upwardly-revised (+12K) 315,000 that occurred in March. Final revisions to data erased 34,000 positions from February's total, but still left it at very solid 236,000. The unemployment rate ticked back upward by a tenth of a percentage point to 3.9%, back to where it was two months ago, and the size of the labor force expanded by only 87,000 people, leaving the labor force participation rate at 62.7% for a second consecutive month. The employment report also said that wages grew by just 0.2% in April; this lowered the annual rate of pay increase to 3.9%, the lowest this figure has been in nearly three years. If it persists, slowing wage growth would help to attenuate price pressures over time.
But for that to happen, it does need to routinely occur over a period of time. One measure of worker compensation -- the Employment Cost Index -- covers the total costs of keeping an employee on the books, and didn't find any such softening of costs in the first quarter of 2024. The ECI -- a Fed-preferred measure of looking at labor costs -- posted an increase of 1.2% in the first quarter of 2024, the fastest that total compensation has growth in a year. Wage growth came in at 1.1% for a third consecutive quarter, so unlike the employment report, no slowing in wage gains was seen here. Benefit costs accelerated during the period and came in at a 1.1% clip, also the largest cost increase in a year. While there may have been some near-term firming in labor compensation, the annual totals were essentially flat: overall worker compensation was up 4.2%, same as in the fourth quarter, wages posted a 4.3% rate (down from 4Q23) and benefits were unchanged at a 3.8% rate over the past year.
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Outsized wage growth -- whether the 3.9% of the employment report or the 4.3% of the ECI -- are a concern for the Fed, since such levels are inconsistent with inflation returning to a 2% rate over time. Fast-rising wages have been and are less of a concern if worker productivity is strong, since a worker who produces more in less or even the same time can be paid more without the need to pass along higher costs in final prices for goods and services. Unfortunately, this wasn't the case in the first quarter of 2024; after three very strong quarterly gains in productivity covering the last three quarters of last year, worker output slowed to just a 0.3% increase to start 2024. Costs of labor per unit -- which had slowed to 0.0% and 0.1% over the last two quarters, respectively -- popped back up to 4.7%, and that's a level of cost that is pretty likely to be passed along into final prices.
It is assumed that "trend" productivity growth across the economy is perhaps 1.5%, and adding the Fed's 2% core inflation rate to it would suggest that wages can grow at about a 3.5% rate and not be worrisome, so the present 4.3% is at least enough to raise concern. That said, it is only a single quarter's sample, but does bear watching to see if this was just a stall in productivity or something else.
We learned last week that GDP growth decelerated in the first quarter of 2024 to a 1.59% rate. Based upon two wide-ranging looks at the manufacturing and service sides of the economy, it didn't exactly start the second quarter of 2024 on a hot note, either.
The twin reports from the Institute for Supply Management (ISM) for April were released this week. The manufacturing gauge recently broke a long string of sub-par readings, climbing over the breakeven value of 50 for the first time in 18 months in March, but couldn't manage to hold there for a second consecutive month. Instead, it declined by 1.1 points to sink below par again with a value of 49.2 for April. New orders lost traction, easing by 2.3 points to 49.1, while employment firmed up a little, rising 1.2 points to 48.6, the highest this component has been since last September. We've suspected that goods deflation had diminished and that at least some goods costs were on the rise again, and there is evidence of this to be seen in the "prices paid" sub-measure. This inflation-tracking portion rang in at a value of 60.9 for April, up 5.1 points from March and the highest value for this measure since June 2022.
Growth in service business activity has been driving the economy for some time, but not so much last month. The ISM's service-business barometer had been burbling along at a modest-to-moderate pace for many months, but activity stalled in April and the top-line index dropped 2 points to 49.4, the first time it has been below the breakeven level of 50 since December 2022. Despite a 2.2-point decline, the measure of new orders remained solidly positive at 52.2, but one tracking employment conditions turned further south, shedding 2.6 points to slide to 45.9 for the month. Prices paid in this segment of the economy also firmed up a bit, with a 5.9-point rise raising this component value to 59.2 for the month, a shift back to something closer to recent overall trend after a hopeful easing in March.
Trade flows also suggest that economic activity has slowed a bit, not only here but also in the economies of our trading partners. Overall, the gap in the value of goods coming to an leaving the U.S. was little changed in March, edging down to $69.4 billion from $69.5 a month prior. However, the dollar value of imports shrank by $5.3 billion, suggesting some sluggishness here, while exports also shrank (by $5.4 billion), pointing to a lack of economic vigor elsewhere, too.
Construction spending ended the first quarter on a downbeat note, with outlays for projects declining by 0.2% in March. Residential construction has generally been a bright spot of late, but not in March, when it contracted by 0.7%. Non-residential projects continued in a three-month skid, with March seeing 0.2% less money spent on warehouses, office buildings, strip malls and the like. Public works projects had been running very hot for a time, took a two-month breather over the winter but expanded by 0.8% for March, so construction projects for things like hospitals, schools and roads are getting some fresh attention of late.
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Sales of new vehicles don't suggest that consumers are pulling back on spending, but there are few signs that folks are running to dealers in droves, either. Bureau of Economic Analysis data suggests that sales of new cars and light trucks came in at a 15.74 million annual rate, little changed from the last few months and very much in line with a moderate trend for auto sales. Before the pandemic, annual sales routinely tracked in the 17 million range, but high costs, tighter financing conditions, few manufacturer or dealer promotions and limited inventories of the most popular models continue to damp sales. Overall, consumers are also keeping their cars much longer than they used to, whether by design or happenstance.
Consumer confidence has taken a hit recently. The Conference Board's measure of consumer moods stepped down by 6.1 points for April, and the resulting reading of a flat 97 for this gauge put it at its lowest point since July 2022. Present conditions were assessed to be less favorable, with this portion of the total dropping 3.6 points to 141.2 for the month, still a fairly sanguine level. However, concerns about the future carved a bit out of the expectations component, and a 7.6-point slide left it at 66.4, the darkest the outlook has been in 21 months. These less happy consumers downtuned their plans to buy homes, cars and appliances, but their collective expectation for inflation remained at 5.3%. While this may seem high, it is just one tick above the near-four-year lows set back in February.
With mortgage rates holding above the 7% mark for several weeks now, it's not surprising that applications for mortgages would have tailed off. In the week ending April 26, the Mortgage Bankers Association reported that requests for mortgage credit declined by 2.3%, pulled down from a decline in applications for mortgages to purchase homes (-1.7%) and for those to refinance existing mortgages (-3.3%). The tough climate for the housing market shows no signs of changing and high mortgage rates in the heart of the spring house hunting season are certainly not helping matters any.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Apr 26 | Mar 29 | Apr 28 | |
| 6-Mo. TCM | 5.40% | 5.37% | 5.03% |
| 1-Yr. TCM | 5.18% | 5.01% | 4.72% |
| 3-Yr. TCM | 4.81% | 4.38% | 3.74% |
| 10-Yr. TCM | 4.65% | 4.22% | 3.46% |
| Federal Cost of Funds |
3.893% | 3.889% | 3.239% |
| 30-day SOFR (daily value) | 5.32968% | 5.32240% | 4.79023% |
| Moving Treasury Average (MTA/12-MAT) |
5.114% | 5.088% | 3.744% |
| Freddie Mac 30-yr FRM |
7.17% | 6.82% | 6.39% |
| Historical ARM Index Data | |||
Although the Fed made no change to interest rate policy, they did announce a change to monetary policy in that they will slow the pace of balance sheet reduction. As we suspected, the change is in the Treasury component of their holdings, where the $60 billion per month rate of portfolio runoff will be reduced to just $25 billion per month starting in June. The ultimate endpoint for the size of the Fed's holdings is unknown, but they want to approach it at a speed that doesn't disrupt financial market functioning, as it did the last time they meaningfully reduced their bond holdings. MBS holdings are unaffected, and will still be allowed to run off at a rate of up to $35 billion per month, not that this pace has yet been achieved. Should it be eventually reached, any excess redemptions over $35 billion will be used to buy up more Treasuries, as the Fed looks to eventually hold only sovereign debt.
While we know at some point that inflation will trend more routinely toward the Fed's 2% core PCE goal, the question remains: When? Did we see the significant inflation in goods essentially run its course, and now are seeing the ongoing (and sometimes lagged) effect of service inflation, which too will need to run its course? If so, is this measured in months, quarters or something more lengthy? There's simply no easy way to know at this point, but one thing we can be certain of is that it isn't right now.
Fed meeting and first-of-the-month cascade of data behind us, next week should be a comparatively quieter one for the financial markets. The softer tenor of the employment report, Fed Chair Powell's "unlikely" comment and the change in bond runoff plans seemed to be enough to help the yield on the 10-year Treasury to step down to levels last seen a few weeks ago, and in turn, this should help spark a slight downturn in mortgage rates next week. It's hard to say how "sticky" the improvement in yields is, but indications are that we could see perhaps an 8 to 12 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac. We'll know Thursday at noon.
What's the outlook for mortgage rates for much of the spring homebuying season? See what we think when you take look at our latest Two-Month Forecast for mortgage rates, covering April into early June.
To start each year, we release our Annual Mortgage and Housing Market Outlook. In it, we take a forward look at a range of topics, including mortgage rates, Fed policy, home sales, home prices and lots more; come July, we do an interim review of our expectations. Have a look and see if you think we're off or on point with our long-range forecast.
For a really long-run outlook, you'll want to check out "Federal Reserve Policy and Mortgage Rate Cycles".
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