Waller’s interest rate cut threshold

Waller, a popular figure in the Federal Reserve, said that the CPI data in April was gratifying. However, if the labor market does not weaken significantly, it will take another three to five months of better inflation data before considering an interest rate cut at the end of the year.
This may require the core PCE sequential average to fall below 0.25% in the coming months.
On May 23 (Thursday), it was announced that the number of initial unemployment claims for the week of May 18 was 215,000. It was lower than the market expectation of 220,000 and the previous value of 223,000. And judging from non-seasonally adjusted data, the number of initial unemployment claims The number of people receiving unemployment benefits is still at a historically low level. It shows that the overall labor market still maintains strong resilience. It has marginally alleviated the market\’s concerns about employment and economic weakness.
The number of people continuing to apply for unemployment benefits in the week of May 11 was 1.794 million. It was slightly higher than the market expectation of 1.793 million and the previous value of 1.786 million. Judging from the non-seasonally adjusted data, the number of people continuing to apply for unemployment benefits was still at an overall level of 1.794 million. Lower levels over the past 10 years.
Overall, after the number of initial unemployment benefit claims increased significantly in the week of May 4 due to some special reasons, it fell for two consecutive weeks on May 11 and 18. It has basically fallen back to the level before the increase. And the non-seasonally adjusted data is also at a historical low. Overall, it shows that the U.S. labor market still maintains strong resilience.
May 23 (Thursday) also announced the May Markit manufacturing and service PMI (preliminary value). Both were higher than market expectations.
In May, Markit manufacturing PMI (initial value) rose to 50.9. It was higher than market expectations of 49.9 and the previous value of 50.0. Services PMI (initial value) rose to 54.8. It was significantly higher than market expectations of 51.2 and the previous value of 51.3. For 2023 A new high since June this year.
Overall, both the ISM Manufacturing PMI and the Markit Manufacturing PMI are on an upward trend, which is also in line with our judgment of a weak recovery in the overseas manufacturing cycle.
The Markit service industry PMI significantly exceeded expectations. It may more reflect the enhanced wealth effect brought about by the recent rise in the stock market, which has further increased residents\’ willingness to consume (especially service consumption). This is in line with our judgment that the US economy remains resilient.
Minutes of the Federal Reserve\’s May interest rate meeting. The overall expressions on the economy, employment and inflation are consistent with recent speeches by Federal Reserve officials. The biggest incremental information is the Fed officials\’ doubts about the restrictiveness of monetary policy.
Although some Fed officials have recently questioned the restrictive nature of monetary policy, the wording in the meeting minutes was \”many\”. There are still more people than the market expected. Although monetary policy is considered restrictive. However, many participants expressed uncertainty about the degree of restrictions. By extension, various participants expressed support for raising interest rates again if there are upward risks to inflation. Overall, they were slightly more hawkish than market expectations.
In the week of May 24, the speeches of Federal Reserve officials basically continued the recent tone. The biggest highlight was the clarification of the conditions for interest rate cuts by Waller, a popular figure in the Federal Reserve. Waller said that the CPI data in April was gratifying, but there was no significant trend in the labor market. In a weak situation, we need to see three to five more months of better inflation data before we consider cutting interest rates at the end of the year.
At the July interest rate meeting, the Fed will also see two CPI data (May and June) and three PCE data (April, May, and June).
At the September interest rate meeting, the Fed will see four CPI data (May, June, July, and August) and four PCE data (April, May, June, and July). So for Waller. The time window for the first interest rate cut is most likely in September. This may require the core PCE month-on-month average to fall below 0.25% in the next few months or even close to 0.20%. However, if the core PCE month-on-month average exceeds 0.30% in any month, it may mean There is no hope of an interest rate cut in September.
Overall, Waller is a hawk among Fed officials. Therefore, his expectations for an interest rate cut may also represent the expectations of some hawkish officials for an interest rate cut.
Authors of this article: Guo Xinyu, Huang Runan. Source: Guojun Macro Research. Original title: \”[Guojun Macro] The interest rate cut threshold of Waller, a popular figure in the Federal Reserve – Guotai Junan Overseas Macro Weekly Report\”