Newscasts - Market Insight: U.S. inflation slows - will it speed rate cuts at the Fed?

First American Financial

14/08/2024 18:00

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Source: 'Reuters - Business videos'

Description: U.S. consumer prices rose only moderately in July, and the annual
increase in inflation slowed to below 3% for the first time since early 2021.
It's good news for investors and for consumers - and for Federal Reserve
policymakers who may be, according to First American Chief Economist, Mark
Fleming, behind the curve in easing their restrictive policy stance.
Short Link: https://refini.tv/4dEQvj1

Video Transcript:

US inflation slows - will it speed rate cuts at the Fed. Welcome to Market
Insight. I'm David Pollard. Inflation appears back on a downward trend, US
consumer prices rose only moderately in July, and the annual increase in
inflation slowed to below 3% for the first time since early 2021. Good news
for investors, for consumers, and for Fed policymakers, who now have more
scope, perhaps to cut rates next month. This in a data heavy week where after
a softer-than-expected PPI reading yesterday, we also get retail sales and
consumer confidence numbers over the next two days. Well, let's get a view
from First American Chief Economist, Mark Fleming. Welcome, Mark. Many thanks
for joining us today. From 9.1% this time just over two years ago to 2.9% last
month, headline inflation is now vanquished, isn't it?

Or really close to being vanquished, the only real containing thing that's
preventing it from getting even closer to two faster is shelter inflation,
which we know is a lagging indicator. And so, I think today's report was good
news. That strengthens the argument for the Fed beginning to loosen monetary
policy in September.

So, is shelter still a concern, it was up 0.4% in these latest numbers, and if
so, how much and what are the other surprises today, both good and bad?

It I guess it's a concern more broadly, shelter inflation in the long run is
going to be a concern because we just haven't built enough housing in this
country. So, there's a sort of a pressure there in the long run inflationary,
but movements month-to-month, we know that it lags by 12 months. I think all
is good and it implies that most every other component of inflation is barely
inflationary at all, and that's particularly good for the consumer when they
go to the grocery store out to eat.

So, do we have enough of a downward trend in inflation to reassure some of the
more hawkish policymakers at the Fed, like Raphael Bostic, who said yesterday,
he needs more data before committing to the idea of easing rates. And indeed,
is the Fed rather slow to come round to this point of view that it must
actually cut rates?

Being compared to other countries, yes, the Fed is slow. Other countries have
already started the monetary loosening cycle. I think it all has to do with
the dual mandate. When the labor markets were so strong and the economy seemed
so strong, why not keep the foot on getting inflation down? There was no real
cost to doing that from the Fed's perspective. Now that there are some
indicators that the economy is weakening, the labor market is weakening,
unemployment is rising. You have to sort of look at both sides of the coin and
say, well, we've got some good numbers here. There's data they like to be
data-driven. There's data that suggests the mandate on full employment is
beginning to be at risk. So, let's take a move now.

Well, the next big data point this week is retail sales tomorrow, we also have
the University of Michigan Consumer Sentiment Index on Friday, and yesterday
we had some pretty downbeat Home Depot earnings. Is the consumer exhausted
after such a long period of high rates and high inflation?

I mean, the consumer is clearly pessimistic, even if the economy is doing well
and the unemployment rate, while rising, is still very low. The consumer is
pessimistic and that's because I think we see the price of eggs and the price
of milk, and we remember what it was two years ago when we go to the grocery
store and that really influences our expectations about the economy.

Now you're a housing specialist as well, of course, this week we have building
permits housing starts, and the NAHB housing index, which slipped to its
lowest level in May and has gone on falling since. Though mortgage rates have
been looking a lot easier just recently.

That's right, the markets are front running the expectation of Fed rate cuts
and that's being built into the 10-year Treasury which in the last couple of
weeks has come down dramatically. And that's been already seen in mortgage
rates. Mortgage rates are closer to 6.5% than over 7%, which where they were
at the beginning of the year. We see refinance activity picking up. So, it all
comes down to if monetary policy loosens and mortgage rates come down, then
the housing market will begin to rebound and confidence in it will increase.

So, would you argue that there is a more benign outlook across the whole of
the US economy now? And if so, what are the flies in that ointment? Where are
the risks is in, and is one of them a possible recession? How big is that
risk?

Have you believe in correlation relationships like the sum rule that suggests
that we're already in recession because of the increase in the unemployment
rate. Recessions are never good. That's certainly dense consumer confidence
when it comes to the housing market, people tend not to buy, make big ticket
purchases like a house when recession. So yes, that risk is there, but by the
same token, we still could have that soft landing if the Fed sort of threads
this dual mandate needle effectively. And lower rates and lower inflation mean
less expensive credit and prices not continuing to rise. Importantly, not
declining but not continuing to rise at the grocery store. And that's all good
for the consumer, and I think they'll feel better when they start to see that
sort of thing.

Okay, Mark Fleming of First American, many thanks for sharing your thoughts
with us today. That is Market Insight