Payden & Rygel: Two paths to more rate cuts Fed
By Jeffrey Cleveland, Chief Economist, Payden & Rygel
We’re not expecting anything earth-shattering from the June FOMC meeting, but it will be interesting to see the revised economic projections and compare the median figures to our own forecasts. There is a possibility the median policymaker “dot” for the policy rate moves to just 1 cut in 2025 compared to 2 in the March release.
The median GDP call could be shaved down and the median core PCE projection might move up to match the consensus around ~3%.
However, while June marks the half-way point of the FOMC meeting calendar for 2025, we still see two paths to more rate cuts than the consensus expects in 2025 (possibly moving in July but more likely by September): disinflation and higher unemployment.
Regarding disinflation, we’ve seen 4 benign CPI readings in a row. The inflationistas keep saying the inflation from tariffs is still coming. Next month. Or the one after that. We’ll see, but even if goods prices jump this summer, we think the softening trends in services will keep core inflation on a moderating trend, with core PCE reaching 2.4% by year-end.
One counter argument we’ve heard is that inflation expectations will delay the Fed. Maybe for now. But our assessment is that consumer inflation expectations follow actual inflation rather than drive it. As inflation cools and the tariff fears subside, inflation expectations will recede.
On unemployment, we think policymakers and investors have grown too complacent as the unemployment rate has been remarkably stable over the last year, highly unusual as the jobless rate is usually falling, OR moving sharply higher in a downturn. Our hunch is the UR will keep moving up, to 4.5% or higher in the fall, enough to convince the Fed that inflation is no longer the most pressing issue any longer.
So, either the jobless rate jumps or inflation softness surprises again, or both, and the Fed is back in the cutting game. Fewer than 50 bps of cuts are now priced in for year-end. Given the number of meetings remaining, we will still take the over (for more cuts).
