Can the Fed Declare Victory on Inflation?

On this episode of The Long View, chief financial analyst for Bankrate.com, Greg McBride, talks of different savings products, interest rates, inflation, and his economic outlook.

Here are a few excerpts from McBride’s conversation with Morningstar’s Christine Benz and Amy Arnott.

The State of the Economy and the Direction of Interest Rates

Christine Benz: We want to delve into the current outlook for interest rates, the Fed’s actions. It’s been a little bit vexing, I think, for a lot of people in your shoes. A lot of economists were expecting to see a weakening in the US economy, at least eventually, due to rising interest rates. We had that inverted yield curve, which has been a harbinger of recession in the past. But that hasn’t materialized. And in fact, we’ve had a couple of recent inflation reports that were hotter than expected. So maybe you can talk about that—how you’re thinking about the state of the economy today and the direction of interest rates in the future.

Greg McBride: The economy has continued to surprise to the upside, both in terms of growth as well as employment. Last year, coming into 2023, it was pretty widespread, almost universal, the consensus that we were going to have a recession before the end of the year. It didn’t happen. In fact, the economy grew faster in 2023 than it did in 2022. And as we come into 2024, I think expectation is that things will slow, we’ll see slower growth, slower growth in the economy, slower growth in employment. But that mythical soft landing is more within reach than we would have expected or dreamed of 12 months ago. So, I think the odds of that soft landing, where the economy continues to grow but inflation gets down to 2%, the odds of that have improved every day. The odds of recession, I think, have really faded into the background. I think it’s too early for a victory lap. I wouldn’t say we’re completely out of the woods, but the odds, I think, are certainly in favor of the soft landing. We did a recent poll of economists and only about one in three expects a recession within the next 12 to 18 months, which is about half of what it was this time a year ago when two in three were saying so.

Is This an Especially Difficult Time for the Economy?

Amy Arnott: Would you say that this has been an especially difficult period to read from an economic standpoint relative to other points in your career?

McBride: I don’t know. That’s a good question. Because there have been, I think, a number of different times where it’s been challenging. We’ve certainly seen things come out of left field. The economy was slowing in late 2019. The Fed was cutting rates, but nobody saw covid coming and economic growth just completely falling off the cliff and then come roaring back. I think there’s been a lot of unique circumstances over the years that make it difficult. This is certainly one of them, but it by no means has a monopoly.

Can the Fed Declare Victory on Inflation?

Benz: What’s your take on the inflation front? Would you say that the Fed can declare victory?

McBride: I think it’s a little early for that. I think things have certainly improved, but inflation is pretty stubborn at this point. It is not going to be a smooth ride down to 2%. It’s not necessarily going to come quickly. I do an annual interest-rate forecast at the beginning of every year. That’s something I start working on usually second half of December. At the time, I said that I expected inflation was going to be pretty stubborn and that the Fed was only going to end up cutting rates twice in 2024. At the time, widespread expectations in the markets were that the Fed was going to cut rates six times or even seven. That always struck me as fantasyland. Even the Fed at the time was saying three. The Fed is still saying three, but now those market expectations have really swung wildly to the point where it’s three or two, or sometimes you hear even some voices saying none this year, and that’s because of those inflation numbers that have been stubborn. We had a nice tailwind in the latter part of 2023 when gas prices were coming down. We don’t have that tailwind. So, as a result, we’ve seen the progress halted, and more recently, we’ve seen the oil prices start to work their way up. I think it’s going to take a couple of months to really see is that something that filters through even into core goods prices, and does that set back some of the progress that we had seen last year on inflation?

Will There Be Two Interest-Rate Cuts in 2024?

Arnott: With that kind of stubborn inflation and some uptick in energy prices, when do you think we will actually see the first rate cuts, and are you still expecting to see about two rate cuts in 2024?

McBride: I think we’re still on track for two. It’s probably not going to start as soon as investors might like. Initially, it was May, and now it was June, but I think even some of those June forecasts are starting to get pushed back. I think a lot will depend on what we get from the CPI reading, for example, next week. If that’s another bad number, those June expectations are going to go right out the window. So, it’s probably going to skew toward the second half of the year, but I still think we’re on track for two, but that’s contingent upon seeing some improvement in inflation, albeit uneven, but continued progress on that front, even if it comes slowly.