Expectations for interest rate cuts in 2024 are being reevaluated as inflation data through March has exceeded expectations. The Federal Open Market Committee (FOMC) policymakers are focused on two key components within the inflation data that would need to move lower to justify a potential interest rate cut. Shelter costs, which make up a significant portion of the Consumer Price Index (CPI), have seen a surprising increase of 5.7% annually to March 2024. This rise is in contrast to the Zillow Observed Rent Index, which only rose by 3.6% during the same period.
The lag in reporting for shelter costs suggests that the CPI data may eventually align with lower rent rates, potentially bringing down overall inflation. With shelter costs carrying a significant weight in the CPI series, a decrease in shelter inflation could have a significant impact on lowering reported CPI. Energy prices are another major concern for the FOMC, as rising costs can affect a wide range of goods and services in the economy. While there has been no significant easing in oil prices in 2024, the sharp decline in natural gas costs could potentially contribute to disinflation.
The jobs market also plays a crucial role in the FOMC’s decision-making process. Policymakers have emphasized the importance of a strong job market in holding interest rates steady. However, if the job market were to weaken, it could accelerate the FOMC’s plans to cut interest rates. Rising wage costs have been a contributing factor to inflation, so a slowdown in job market strength could help ease wage pressures and bring inflation down. Fed Chair Jerome Powell has indicated that the FOMC would need greater confidence that inflation is moving towards the 2% target before considering a rate cut.
For now, the FOMC is reluctant to cut interest rates as the disinflation seen in 2023 has stalled based on early 2024 data. The potential for disinflation in shelter costs and some moderation in energy prices could bring inflation closer to the FOMC’s target. However, if the jobs market were to weaken significantly, it could prompt the FOMC to cut interest rates sooner to address inflation concerns. Powell has emphasized the need for caution, stating that the FOMC will maintain current restriction levels for as long as necessary in the face of persisting higher inflation.
