Not that long ago, it looked as if the May meeting of the Federal Reserve would kickstart a series of cuts to the highest interest rates since the 1980s.
But as the Fed’s monetary policy committee gathers in Washington beginning on Tuesday, talk of a rate cut is nowhere to be found.
A couple of months of hotter than expected inflation readings, consumer spending that just won’t quit and a labor market that is humming along have thrown the script for the Fed out the window.
“Stubborn inflation and resilient economic activity through the first few months of the year have left the FOMC little reason to ease policy in the near term,” said Sam Bullard, managing director and senior director for Wells Fargo’s corporate and investment banking group. “Indeed, a number of Fed officials … have noted that the string of hot inflation prints shows that progress on inflation has stalled and the Fed needs to ‘recalibrate.’”
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Stocks ended the week on a high note with the S&P 500 and the tech-heavy Nasdaq indices posting strong gains after some of the top technology stocks, including Microsoft and Alphabet, delivered on their earnings reports.
That took some of the sting out of Thursday’s report that growth in gross domestic product slowed in the first quarter to 1.6% after posting a 3.4% jump in the fourth quarter.
“The main culprits of the soft GDP number were net exports and government spending,” BCA Research wrote on Friday. “Government spending growth came in at 1.2% on an annualized quarter-on-quarter basis, the lowest reading since 2022. Meanwhile, net exports subtracted 0.86 percentage points from GDP growth. Private inventories also made a negative contribution, subtracting 0.35 percentage points from growth.”
While one measure in the GDP report showed a key inflation metric rising at a 3.7% rate in the quarter, BCA still sees inflation coming under control in the months ahead.
“Overall, our strategists believe that the disinflation trend remains intact and ultimately expect consumer spending to weaken and the labor market to deteriorate as the economy heads toward recession later this year or in early 2025,” BCA said.
Even though there is almost no chance of a rate cut being announced this week, the Fed meeting and press conference afterward on Wednesday still bears watching as it may offer clues to the central bank’s view of inflation and the economy for the rest of the year. The Fed may also update its progress on reducing its balance sheet of securities holdings amassed during the COVID-19 pandemic.
The week will offer plenty of other economic data points starting on Tuesday with the S&P Corelogic home price index for February. Though dated, it may show whether housing inflation – a key component of the consumer price index – has receded in 2024.
Tuesday also brings the April reading on consumer confidence from the Conference Board. Expectations are that it will slow a slight dip from March but the trend has been for movement in sentiment to be largely sideways.
A variety of reports on the labor market begin Wednesday with private payroll firm ADP’s monthly survey of employers for April. Forecasts that it will come in slightly lower than March’s 184,000 gain, but still at a level consistent with an expanding jobs markets. Also Wednesday, the Labor Department issues its job openings report for March. Expectations are that the number will drop slightly from February, but will still be around the 8.7 million level.
The week ends with the April jobs report from the Labor Department on Friday. Economists expect a slowdown from the surprising 303,000 increase in March but still somewhere around 250,000, a robust showing by historical standards.