US data on growth and inflation is not following the rate cut script. But we suspect the FOMC would like to start cutting rates by July if the data gives them half a chance.
From a growth perspective the US economy doesn't feel as if it urgently need rate cuts right now: employment growth picked up in Q1, consumption remained robust and real incomes continue to grow. Meanwhile, the AI boom is fueling demand for data centers and new power supplies and subsidies designed to help bring manufacturing back home are shoring up capital spending. Worse still from a rate cut perspective, core CPI services less shelter has run at a 5% annualised rate for 3 months in a row.
Were those trends to continue throughout the second quarter, we would be looking not only at the likelihood of no rate cuts this year, but at the possibility that they might need to resume tightening at some point, and perhaps especially if Trump were to win a second term in the White House.
Trump's stated policies are designed for the campaign trial and who knows how many of them would actually be implemented but on the face of it they would be bad for inflation, debt sustainability and a threat to the Fed's independence. So that prospect must be at the back of the Fed's collective mind, albeit these are fears that dare not speak their name.
So our sense is that the FOMC would be happier if the data gave them a chance to start cutting rates well ahead of the election itself. And if not June, that means July, by which time they will have three more readings on inflation.
As documented in the charts below, sticky shelter inflation and soaring costs for car insurance combined with a normalisation of medical services inflation have kept core inflation high over the past three months.
Better readings for inflation are probably a precondition for putting rate cuts back on the agenda in the absence of a marked slowdown in growth. In our view, there are grounds for thinking that shelter and car insurance costs will indeed slow down over the next few months which could keep the window open for July.
