The FOMC announced a 50-basis point rate cut on September 18, but it was not a unanimous decision
A surge in household liquid assets during the pandemic contributed to inflation troubles; we revisit recent data across income brackets
Recent data show no signs of economic alarm, but financial markets continue to closely watch labor market readings
Though not a unanimous decision, the FOMC announced a 50-basis point rate cut at the September 18 meeting. Fed Governor Michelle Bowman dissented against the decision, preferring a smaller 25-basis point move. This was the first opposing vote by a member of the Board of Governors since 2005, and the updated forecasts of the 19 FOMC participants provided after the announcement suggested Bowman wasn’t alone. While no other voters officially dissented, 9 of the 19 participants forecasted 75 basis points (bps) or less of rate cuts in the final three meetings of 2024, which would imply none greater than 25 bps at each meeting. These other voters were clearly not convicted enough to vote against Powell’s guidance, likely focused more on the ultimate path of rate cuts over the next 12 months than the decision for that one meeting. Why the larger 50-bp cut to begin? Perhaps Powell is still feeling the sting of starting too late with rate hikes in late 2021/early 2022 and didn’t want to make same mistake twice. This assumes, of course, that the labor market is on pace to deteriorate at a faster pace than the recent data trend would suggest.
The updated Summary of Economic Projections (SEP) showed a median forecast of 100 bps of rate cuts in 2024 (including the 50 bps at that meeting) and another 100 bps in 2025. By the end of 2026, the fed funds rate would settle at a neutral rate of 2.875%. This forecast through 2025 remains less dovish relative to the bond market pricing for 50 bps more rate cuts over that timeframe. There remains a debate as to whether the Fed will go with another over-sized cut at the next meeting in November, but Powell recently pushed back on that assumption somewhat. In responding to questions at an economic conference on September 30, he said “this is not a committee that feels like it’s in a hurry to cut rates quickly.” That would seem to contradict with the September 18 decision, but he was likely trying to level set expectations for upcoming meetings.
One important aspect of monetary policy that has not been addressed recently is the current pace of balance sheet reductions, which continues even as the Fed lowered the fed funds rate. Fed leaders have suggested that reserves in the banking system remain ample, and consequently, they have provided no guidance of an imminent change in the pace of principal roll-off from its bond holdings. All of this brings us back to the data in the coming months and how the economy evolves as it relates to the path of monetary policy.
More Runway for Consumers?
For more than a year we have tracked the surge in aggregate household liquid assets (HLA) during the pandemic as a result of extraordinary government stimulus and reduced spending activity during lockdowns. We source the HLA data from a quarterly Fed report, which includes checking/savings account balances plus money market fund balances. As a refresher, HLA grew by an average of approximately $500 billion per year in the decade prior to COVID, and in 2020 and 2021, HLA grew by nearly $5 trillion, or an excess of nearly $4 trillion over the prior decade average. As we approached the end of 2023, it appeared that this excess liquidity had been mostly exhausted for all but the top 20% income bracket due to the cumulative effects of inflation and robust spending patterns. However, the most recent data as of Q1 suggests that this metric has expanded again for all but the top 1% and bottom 20% income brackets (Exhibit 1).
Exhibit 1
Source: Federal Reserve, BEA, ALM First
The table tracks the cumulative growth in HLA since Q4 2019 and deducts cumulative inflation using the PCE deflator over that timeframe. The top income bracket can be skewed by asset allocation decisions (i.e., money market funds vs. stocks), but the bottom income bracket has clearly felt the inflation after spending the pandemic stimulus funds. From a credit perspective, these borrowers are more susceptible to consumer debt defaults, particularly if unemployment rises further.
There have still been no signs of material deterioration in the labor market or economy as a whole that might cause alarm. Initial jobless claims have held in the 235,000 or below range for several weeks now. The August JOLTS report showed no sign of distress in the labor market either. Job openings have clearly come down from the 2021 peak but appear to have leveled off in recent months and remain approximately 12% above the 2019 average. Similar data from staffing firm Indeed suggests a similar trend. The September jobs report will be closely watched, as have the last several monthly reports, and financial markets will likely continue to cling to any sign of weakness as it relates to a potentially more dovish Fed response.
One additional situation that will be monitored is the initiation of a strike by dockworkers at ports from Maine to Texas on October 1. A sustained dispute could disrupt supply chains for multiple sectors which could put upward pressure on consumer prices.
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