The U.S. Federal Reserve has kept interest rates steady between a range of 5.25% to 5.5% amid modest progress on inflation. Policymakers also indicated just one rate cut is likely this year. Rannella Billy-Ochieng, Senior Economist with TD, speaks with MoneyTalk’s Anthony Okolie about the state of the U.S. economy and the implications for Fed monetary policy going forward.
Print Transcript
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Well, as expected, the Federal Reserve kept its interest rate steady for a seventh consecutive meeting. Joining us today with her reaction on the latest Fed decision is Rannella Billy-Ochieng with TD. And, Rannella, the Fed acknowledged that there is progress on inflation, but they're now projecting just one rate cut this year. Did anything catch you by surprise today?
I think overall, we were expecting the Fed to dial back the actual cut in the rate, interest rates. I think for us, if we look at the details of the messaging that they released today, we would see a few things. On one hand, they acknowledge that we're seeing progress on the inflation fight, and that's something to be celebrated.
But on the other hand, they remain a bit cautious because, granted, if you look at the inflation reading over the last four months, we had some up and downs. So earlier in the year, we saw inflation being very, very sticky, whereas the inflation print for this month actually came in better than expected, with a flat reading.
So I think the Fed is not convinced that we are where we need to be in terms of inflation progressing. So that calls for some caution and for them to actually push back from moving from three rate cuts to something like one.
OK. And you mentioned we did see an acceleration in inflation earlier in the year. This is just one print that we just saw. Given that print, and the stronger-than-expected US jobs data that we saw recently as well, is there a possibility that the Fed may not cut interest rates at all this year?
So we think that's a possibility. But at the end of the day, we have to acknowledge the balance of risk. And risk exists on both sides. And that's actually something that the Fed was clear to point out when they were doing their press conference today.
So I think if you look at the jobs market data, we know that employment growth has been strong. And that's something we cannot necessarily deny. But if you take a longer-term posture, relative to the beginning of last year, whereas payroll employment was averaging 250,000 in May, beginning of last year, there were something closer to 290.
So we are still seeing some deceleration, but it's happening slowly. So I think the Fed is going to play the cautious game, moving very slowly and reacting to the evolution of the data. Is there a risk that they wouldn't cut? That's a risk.
But so far, we're encouraged to be optimistic, because if you actually drill down within the details-- for example, if you look at hiring and things like job-switching, you actually see evidence of cooling. And it's actually showing up on the wage pressures for people who switch jobs. That's actually down about 2.1 percentage points. And these are things that really matter.
On the other hand, if you actually look at the breadth of hiring, the diffusion index shows that the breadth of hiring, actually, if you look at a six-month average, that's actually coming down. It's moving slow, and that really argues for the Fed to be cautious, but it's still coming down. So we think that, given the language that the Fed used today, by acknowledging that there's progress on the inflation front, we're inclined to think that a rate cut is more likely than not likely later this year.
OK. Now, given that outlook, what does this potentially mean for the US dollar, which, as you know, has been stronger relative to some of the other baskets of international currencies?
Yeah. So, for example, in Canada, we saw the Bank of Canada move to cut rates recently. And this has been happening in other advanced economies as well. Whereas in the US, because we're seeing the US economy growing very strongly, we're seeing a jobs market that's still robust, still adding a lot of jobs, and we're seeing inflation remaining very sticky.
We think that the Fed could buy itself a bit more time and remain on the sideline. And by virtue of that, we anticipate that US bond yields are actually going to be higher relative to their peers. That's going to help the US dollar to strengthen. And that's something that we actually have embedded in our forecasts.
I think if you actually take a longer view of things, and you look at the underlying fundamentals within the US economy, we know for a fact that the US actually boasts of very strong productivity when countries like Canada and, to some extent, the UK, who have been struggling a bit with labor productivity-- the US is actually the exception and doing very well. And that stronger productivity is actually going to argue for the currency differential to favor the US dollar.
So we think going forward, the US is actually going to benefit from more of the interest rate differential on the stronger productivity. We also have to keep in mind the geopolitical risk-- things happening in Ukraine, as well as the conflict going on in the Middle East. These are things that-- when there's geopolitical risk, there's always a flight to safety, and it favors the greenback. So on net, we think the US is actually going to benefit from these variety of situations.
OK, so given all of that-- there's a lot of movement in markets-- what will you be watching over the next few months that could potentially change your view on interest rates?
Well, aside from inflation, that's going to keep us on our toes. Like I said, a one-month reading doesn't necessarily make a trend. We were happy to see today's inflation print being very encouraging. But I think the inflation progress is going to be very, very important in terms of dictating the path of future rate cuts.
As you guys are very aware, shelter inflation remains the culprit. This month, it came in about 4/10 month over month. And that has been persistently strong. And it's something that's, I'm sure, giving the Fed officials a lot of nightmare. If we compare that growth to where we were at pre-pandemic, that part of the basket used to grow about a tenth or two.
So we're still very far away from where we need to be on the inflation side, particularly shelter inflation, one. Two, the jobs market is actually going to really matter. So far, we're not seeing evidence of cracks emerging. But if that should materialize, that's definitely something that the central bank is going to react to, given their dual mandate.
And certainly on the US, we have the US elections coming up later this year. That's going to inform a lot of things from fiscal policy with regards to taxation, debt and borrowing, and as well immigration flows. We know Trump and Biden, they have very different policies, and that's going to really flow into expectations around things like what the border flows would look like, and what that would flow into in terms of consumption, and even broader spending from a government level.
So there are lots of things to keep us busy. But the big-- the elephant in the room would be inflation.
OK. Lots of things to consider. Rannella, thanks very much for joining us.
My pleasure.
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Well, as expected, the Federal Reserve kept its interest rate steady for a seventh consecutive meeting. Joining us today with her reaction on the latest Fed decision is Rannella Billy-Ochieng with TD. And, Rannella, the Fed acknowledged that there is progress on inflation, but they're now projecting just one rate cut this year. Did anything catch you by surprise today?
I think overall, we were expecting the Fed to dial back the actual cut in the rate, interest rates. I think for us, if we look at the details of the messaging that they released today, we would see a few things. On one hand, they acknowledge that we're seeing progress on the inflation fight, and that's something to be celebrated.
But on the other hand, they remain a bit cautious because, granted, if you look at the inflation reading over the last four months, we had some up and downs. So earlier in the year, we saw inflation being very, very sticky, whereas the inflation print for this month actually came in better than expected, with a flat reading.
So I think the Fed is not convinced that we are where we need to be in terms of inflation progressing. So that calls for some caution and for them to actually push back from moving from three rate cuts to something like one.
OK. And you mentioned we did see an acceleration in inflation earlier in the year. This is just one print that we just saw. Given that print, and the stronger-than-expected US jobs data that we saw recently as well, is there a possibility that the Fed may not cut interest rates at all this year?
So we think that's a possibility. But at the end of the day, we have to acknowledge the balance of risk. And risk exists on both sides. And that's actually something that the Fed was clear to point out when they were doing their press conference today.
So I think if you look at the jobs market data, we know that employment growth has been strong. And that's something we cannot necessarily deny. But if you take a longer-term posture, relative to the beginning of last year, whereas payroll employment was averaging 250,000 in May, beginning of last year, there were something closer to 290.
So we are still seeing some deceleration, but it's happening slowly. So I think the Fed is going to play the cautious game, moving very slowly and reacting to the evolution of the data. Is there a risk that they wouldn't cut? That's a risk.
But so far, we're encouraged to be optimistic, because if you actually drill down within the details-- for example, if you look at hiring and things like job-switching, you actually see evidence of cooling. And it's actually showing up on the wage pressures for people who switch jobs. That's actually down about 2.1 percentage points. And these are things that really matter.
On the other hand, if you actually look at the breadth of hiring, the diffusion index shows that the breadth of hiring, actually, if you look at a six-month average, that's actually coming down. It's moving slow, and that really argues for the Fed to be cautious, but it's still coming down. So we think that, given the language that the Fed used today, by acknowledging that there's progress on the inflation front, we're inclined to think that a rate cut is more likely than not likely later this year.
OK. Now, given that outlook, what does this potentially mean for the US dollar, which, as you know, has been stronger relative to some of the other baskets of international currencies?
Yeah. So, for example, in Canada, we saw the Bank of Canada move to cut rates recently. And this has been happening in other advanced economies as well. Whereas in the US, because we're seeing the US economy growing very strongly, we're seeing a jobs market that's still robust, still adding a lot of jobs, and we're seeing inflation remaining very sticky.
We think that the Fed could buy itself a bit more time and remain on the sideline. And by virtue of that, we anticipate that US bond yields are actually going to be higher relative to their peers. That's going to help the US dollar to strengthen. And that's something that we actually have embedded in our forecasts.
I think if you actually take a longer view of things, and you look at the underlying fundamentals within the US economy, we know for a fact that the US actually boasts of very strong productivity when countries like Canada and, to some extent, the UK, who have been struggling a bit with labor productivity-- the US is actually the exception and doing very well. And that stronger productivity is actually going to argue for the currency differential to favor the US dollar.
So we think going forward, the US is actually going to benefit from more of the interest rate differential on the stronger productivity. We also have to keep in mind the geopolitical risk-- things happening in Ukraine, as well as the conflict going on in the Middle East. These are things that-- when there's geopolitical risk, there's always a flight to safety, and it favors the greenback. So on net, we think the US is actually going to benefit from these variety of situations.
OK, so given all of that-- there's a lot of movement in markets-- what will you be watching over the next few months that could potentially change your view on interest rates?
Well, aside from inflation, that's going to keep us on our toes. Like I said, a one-month reading doesn't necessarily make a trend. We were happy to see today's inflation print being very encouraging. But I think the inflation progress is going to be very, very important in terms of dictating the path of future rate cuts.
As you guys are very aware, shelter inflation remains the culprit. This month, it came in about 4/10 month over month. And that has been persistently strong. And it's something that's, I'm sure, giving the Fed officials a lot of nightmare. If we compare that growth to where we were at pre-pandemic, that part of the basket used to grow about a tenth or two.
So we're still very far away from where we need to be on the inflation side, particularly shelter inflation, one. Two, the jobs market is actually going to really matter. So far, we're not seeing evidence of cracks emerging. But if that should materialize, that's definitely something that the central bank is going to react to, given their dual mandate.
And certainly on the US, we have the US elections coming up later this year. That's going to inform a lot of things from fiscal policy with regards to taxation, debt and borrowing, and as well immigration flows. We know Trump and Biden, they have very different policies, and that's going to really flow into expectations around things like what the border flows would look like, and what that would flow into in terms of consumption, and even broader spending from a government level.
So there are lots of things to keep us busy. But the big-- the elephant in the room would be inflation.
OK. Lots of things to consider. Rannella, thanks very much for joining us.
My pleasure.
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