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The U.S. Federal Reserve did as expected, keeping interest rates unchanged at between 5.25% and 5.5%. Andrew Hencic, Senior Economist at TD, speaks with Greg Bonnell about the Fed’s monetary policy and the outlook for the economy going forward.
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* [AUDIO LOGO]
* US Federal Reserve held its key interest rate unchanged as it recognized the resilience of the American economy. Joining me to discuss this latest rate announcement is Andrew Hencic, Senior Economist at TD. Andrew, thanks for joining us today.
* Thank you very much for having me.
* All right, so we got another rate decision behind us now, always greatly anticipated by the market. What stood out for you today?
* I think it was really interesting to take a look at the summary of economic projections. Growth is now expected to persist above trend in the coming years. Consequently, the outlook for interest rates was moved higher in nudge in '25 and '26. Now, still three cuts for 2024, but the out years are interesting for sure.
* It is very fascinating. And the Fed has simply recognized what the economic data has presented-- a resilient labor market, a resilient economy. But the fact that they still think that they can cut three times this year, is there any disconnect between that? Or is it simply they cover that by pushing it out further?
* I don't think there is. A part of the upgrade to growth this year is simply the fact that growth closed out 2023 at a very strong clip. And that's just mathematically going to raise the outlook for this year. Our view is that the US economy will begin to slow into the back half of 2024. And that's going to create conditions where the Fed is going to start to feel comfortable cutting interest rates.
* So if we start thinking about a timeline for all this, Jerome Powell-- again, today, that patience seems to be the credo is what we're getting preached from central bankers. He talked about the fact, listen, we've come a long way in the fight against inflation. But the path to 2% is not assured. We need to stay the course. We put that all together, revised economic projection higher, when did they actually start cutting rates? When would they be in a position to do so?
* Based on our outlook, we're looking for cuts to start in the third quarter of this year, recognizing first quarter started well, particularly on the labor front. But there are cracks starting to show in the economy. And from our lens, with consumption spending starting to slow around mid-year, the back half of 2024 is going to see a little bit, I don't want to say weakness, but a weaker economy than it is now. And that's going to create the conditions where the Fed is going to really feel comfortable about cutting interest rates.
* Ultimately, is that what it comes down to, the consumer? It's a consumer-led economy. We finally see the consumer say, hey, maybe I'm not going to start-- spend as much as I have been spending.
* Yeah, that's pretty much the view. There are signs that they're-- like I mentioned, cracks are starting to show. So if you look at delinquency rates on consumer lending products, they've started to tick up. Our assessments are that the excess savings that consumers have been drawing on for most people in the income distribution, those have been drawn down with the exception of the very high-income folk.
* All these things put together would suggest that, with a softening labor market, you're going to see some cooling in consumption expenditures that is going to take some of the pressure off the economy, cool some of those inflationary forces.
* Now, with the American economy performing this well in the face of these high borrowing costs, we've been told by-- in no uncertain terms by the central banks, these are restrictive rates that they put us in to try to tame inflation. An interesting idea has been bubbling up lately. What if we didn't get any rate cuts at all this year? I know that's not the base case. But what would have to happen that we close out this calendar year and say, well, the Fed didn't cut?
* Well, similar to the recognition that we saw in the summer projections today, it's certainly not the base case. Our baseline view is that the economy is going to slow into the back half of the year. But as with anything, there are risks to both the upside and downside. In our assessment, the risks remain to the upside in that the economy continues to outperform this restrictive policy rate environment.
* In that event, rates would stay high for longer, and cuts could be delayed. But again, that's not really our baseline scenario. That's not the Fed's baseline scenario. The most likely path is that the cumulative effect of these interest rates really does start to take hold and the economy begins to cool, allowing interest rates to come down.
* All right, interesting stuff, as always. Thanks for joining us to break it down as it happened.
* Thank you very much for having me.
[AUDIO LOGO]
[MUSIC PLAYING]
* US Federal Reserve held its key interest rate unchanged as it recognized the resilience of the American economy. Joining me to discuss this latest rate announcement is Andrew Hencic, Senior Economist at TD. Andrew, thanks for joining us today.
* Thank you very much for having me.
* All right, so we got another rate decision behind us now, always greatly anticipated by the market. What stood out for you today?
* I think it was really interesting to take a look at the summary of economic projections. Growth is now expected to persist above trend in the coming years. Consequently, the outlook for interest rates was moved higher in nudge in '25 and '26. Now, still three cuts for 2024, but the out years are interesting for sure.
* It is very fascinating. And the Fed has simply recognized what the economic data has presented-- a resilient labor market, a resilient economy. But the fact that they still think that they can cut three times this year, is there any disconnect between that? Or is it simply they cover that by pushing it out further?
* I don't think there is. A part of the upgrade to growth this year is simply the fact that growth closed out 2023 at a very strong clip. And that's just mathematically going to raise the outlook for this year. Our view is that the US economy will begin to slow into the back half of 2024. And that's going to create conditions where the Fed is going to start to feel comfortable cutting interest rates.
* So if we start thinking about a timeline for all this, Jerome Powell-- again, today, that patience seems to be the credo is what we're getting preached from central bankers. He talked about the fact, listen, we've come a long way in the fight against inflation. But the path to 2% is not assured. We need to stay the course. We put that all together, revised economic projection higher, when did they actually start cutting rates? When would they be in a position to do so?
* Based on our outlook, we're looking for cuts to start in the third quarter of this year, recognizing first quarter started well, particularly on the labor front. But there are cracks starting to show in the economy. And from our lens, with consumption spending starting to slow around mid-year, the back half of 2024 is going to see a little bit, I don't want to say weakness, but a weaker economy than it is now. And that's going to create the conditions where the Fed is going to really feel comfortable about cutting interest rates.
* Ultimately, is that what it comes down to, the consumer? It's a consumer-led economy. We finally see the consumer say, hey, maybe I'm not going to start-- spend as much as I have been spending.
* Yeah, that's pretty much the view. There are signs that they're-- like I mentioned, cracks are starting to show. So if you look at delinquency rates on consumer lending products, they've started to tick up. Our assessments are that the excess savings that consumers have been drawing on for most people in the income distribution, those have been drawn down with the exception of the very high-income folk.
* All these things put together would suggest that, with a softening labor market, you're going to see some cooling in consumption expenditures that is going to take some of the pressure off the economy, cool some of those inflationary forces.
* Now, with the American economy performing this well in the face of these high borrowing costs, we've been told by-- in no uncertain terms by the central banks, these are restrictive rates that they put us in to try to tame inflation. An interesting idea has been bubbling up lately. What if we didn't get any rate cuts at all this year? I know that's not the base case. But what would have to happen that we close out this calendar year and say, well, the Fed didn't cut?
* Well, similar to the recognition that we saw in the summer projections today, it's certainly not the base case. Our baseline view is that the economy is going to slow into the back half of the year. But as with anything, there are risks to both the upside and downside. In our assessment, the risks remain to the upside in that the economy continues to outperform this restrictive policy rate environment.
* In that event, rates would stay high for longer, and cuts could be delayed. But again, that's not really our baseline scenario. That's not the Fed's baseline scenario. The most likely path is that the cumulative effect of these interest rates really does start to take hold and the economy begins to cool, allowing interest rates to come down.
* All right, interesting stuff, as always. Thanks for joining us to break it down as it happened.
* Thank you very much for having me.
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[MUSIC PLAYING]
