To Cut or Not to Cut. That Is the Question. What Will the Fed Do?

Last Edited by: LPL Research

Last Updated: January 24, 2024

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Jeffrey Roach (00:02):

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial. Now I want to highlight a few important charts as investors debate whether or not the Fed will cut rates as early as March, and whether or not the Fed will cut as much as they want to admit they will at this time. So first, inflation expectations appear well-anchored. From the University of Michigan Survey, we see inflation expectations over the next 12 months dipped to 2.9%, the lowest since the end of 2020. Now, when you look at this chart, you see this is certainly good news for the Fed. Inflation expectations over the next 12 months has convincingly improved, giving the Fed the opportunity to cut rates as early as March, but only if other data come in weaker. Clearly, risk appetite recently has improved as investors consider bringing cash off the sidelines and into capital markets. Second, the housing market is humming, provided some boost to the economy.

 

Jeffrey Roach (00:53):

Building permits, a leading indicator of future construction, accelerated in December, as builders expect the housing market to improve as borrowing costs fall. The bottom line here is falling mortgage rates should help demand for housing in the coming months. Now, despite the month-over-month decline in December starts, construction activity remains close to pre-pandemic levels. The low supply of existing homes in the market is nudging potential buyers to new construction. Investors should expect opportunities within the home-builder sector throughout this year. Third, businesses will likely slow the pace of hiring. Now, if I had to pick one sector, that will determine the timing and the magnitude of rate cuts, it would be the job market. So far, the pace of hiring has slowed but not alarmingly so. Wage growth has finally leveled up to support consumer spending. However, investors should track the weekly staffing index from the American Staffing Association, which does hint at a slightly softer than expected payroll print for the upcoming months. If you want more insights on global market trends, follow us on social media and take care.

 

LPL's Chief Economist, Dr. Jeffrey Roach explains why declining inflation expectations and growing construction activity boosted risk appetite. Plus, the job market is key to future Fed decisions.

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