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Monthly Economic Insights

Positive inflation and jobs report opens the door to rate cut this year

Federal Reserve officials left interest rates unchanged at their meeting earlier this month and predicted one rate cut before the end of 2024, reflecting a cautious approach to managing inflation broadly in line with Wall Street expectations.

The U.S. inflation rate in May stood at 3.3%, down slightly from 3.4% in April (with core falling to 3.4% in May vs. 3.6% in April). This is positive movement, but still not as low as the Fed would like. However, the progress on inflation was further supported by a slight uptick in the unemployment rate in May to 4.0% from 3.9% in April.

In March, the Fed had anticipated three rate cuts this year, but persistent inflation early in the year led to a revision. The latest Consumer Price Index (CPI) data is good news, yet Fed officials stressed the importance of multiple positive data points before making significant policy shifts.

If only one rate cut occurs this year, the policy rate would reduce to 5.1%. The Fed did not specify when this cut might happen, leaving open possibilities for its four remaining meetings in 2024.

The Fed hinted at the possibility of more significant rate cuts in 2025, suggesting up to four cuts compared to the three previously forecasted.

Looking closely at the stronger than expected jobs report in May, sectors contributing significantly to job gains include healthcare, professional and business services and leisure and hospitality​. As noted above, unemployment did rise slightly to 4.0% in May, up from 3.9%, but well within healthy and acceptable ranges.

Job openings (JOLTS) continued to soften through April (the most recent data point) at 8.06 million openings vs a peak of 12.03 million openings in March of 2022.  Through this slowing period, we have moved from a peak of 2.0 job openings to each unemployed to now 1.2 job openings to each unemployed today.  This is further evidence (outside of the unemployment rate increasing from a low of 3.5% to 4.0% today) that the labor market is softening on the margin, which is actually good for the Fed in terms of their fight against inflation.  

The GDP growth rate for 2024 is expected to be around 2.1%, reflecting moderate expansion. This forecast is driven by solid consumer spending and business investments, balanced by challenges in global trade and geopolitical uncertainties​.

Bottom Line: The Federal Reserve's decision to maintain the federal funds rate at 5.25-5.50% reflects a cautious approach to balancing economic growth and controlling inflation.

The data proves the Fed is on the right track, though. Sustained job growth, tolerable levels of unemployment, and increased spending on services, particularly in healthcare and hospitality, support continued GDP growth among households. Solid trends in technology and infrastructure investments also lend further credence to ongoing economic expansion since these investments are essential for productivity improvements and long-term financial stability.

Overall, markets agree with the Fed’s approach. The bullish sentiment continues to prevail, with the S&P 500 up nearly 14 percent this year, far outperforming what Wall Street analysts had expected at the start of 2024. Volatility will likely continue, but consumers and investors have adapted and remain relatively confident.





— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company

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