MacroResearchBoard

Yet Another Fed Pivot Looms in 2025 – September 16, 2024

A just-published report updated our view on the U.S. inflation outlook after a high-side miss for the core inflation rate in the August CPI report. Aside from the unwinding of pandemic-related distortions, it has ironically been immigration more than restrictive Fed policy that has brought down services inflation and raised the unemployment rate. The increase in unemployment has been driven mostly by a surge in immigration (not layoffs), but has nonetheless played a large role in the Fed’s shift to dovishness with the first rate cut looming at this week’s FOMC meeting.

The sudden jump in immigration has indeed been a drag on services inflation but will soon max out and start contributing some upside to inflation, especially via demand for housing. The widespread hopes for much lower rent inflation will not pan out, when one considers that the CPI rent measure in level terms is still well below private sector gauges.

Adding it up, we expect sticky above-target inflation and a resilient economy to limit how much the Fed can lower rates in the next 6-12 months. The Treasury market will eventually be forced to rein in rate cut expectations, coinciding with another upleg in bond yields.