- YX Insights
- Posts
- What Are Fed Speakers Saying About Rate Cuts?
What Are Fed Speakers Saying About Rate Cuts?
Analysing Latest Views on Inflation and Interest Rates
Yimin Xu
June 19, 2024
Hi YXI Friends,
Today, we are dissecting the Fed speakers’ delivery from yesterday. We will compare how their tonality has evolved in the past few months given the latest benign CPI data.
You can jump straight to individual Fed speaker section via the links below. The sources of the quotations are referenced at the bottom of this article.
Let’s have some fun!
Tools I find useful:
TradingView: I use TradingView for all my chart analysis. It is very fast and simple to play with, including the mobile and desktop apps. Sign up here to get $15 off your new TradingView plan.
Koyfin: I use Koyfin for stock screening, comparative analysis, and fundamental analysis. It provides very comprehensive data and features at a reasonable price. Sign up here to get 15% discount off all Koyfin plans.
Fastgraphs: I find Fastgraphs very useful in gauging whether a stock is underpriced or overpriced versus the fundamentals. Sign up here to get 25% off using the coupon “AFFILIATE25” at the check out.
Fed Speakers: Barkin, Kugler, Collins, Goolsbee
We had the chance to hear from four Fed speakers yesterday.
Among them, Barkin (Richmond Fed) and Kugler (Fed Board) are voting members. Their opinions therefore weigh more than the other two.
Collins (Boston Fed) and Goolsbee (Chicago) Fed will rotate into the FOMC next year, by when the rate cuts should be underway.
Let’s walk through each Fed speaker’s latest tone.
Thomas Barkin, Richmond Fed
We are clearly on the back side of inflation…but the question is, 'Are we all the way back?'
I think it's hard to know how much signal to take from inflation last year, or this quarter, or last couple of weeks.
On the goods side, I hear pricing power is waning… on services side, I still think firms are exploring raising prices as much as possible…shelter and services inflation is not quite there.
I didn't get more confidence in Q1 this year about inflation, we'll see where we go.
Sustainment means that headline inflation continues to operate on a path that gives you confidence it’s heading to 2%, [And broadening means] it’s running across the basket, not just driven by a small group.
Barkin’s comments in May:
“I am optimistic that today’s restrictive level of rates can take the edge off demand in order to bring inflation back to our target…The full impact of higher rates is yet to come.”
My read
Barkins is firmly in the wait-and-see-more camp, and would be hard pressed to show a date in mind for the first rate cut.
Given shelter and services make up the overwhelming majority of the current inflation readings, the bar for Barkin to get confidence about inflation is very high.
I would not be surprised if he wrote down “no cut” or “1-cut” in the Fed’s latest Dot Plot.
Adriana Kugler, the Fed Board
I estimate that 12-month PCE inflation in May was a bit lower than in April.
Reduced frequency of price adjustments helps moderate prices…the general trend has been consistent with ongoing disinflation.
Longer-run inflation expectations have remained well anchored.
Consumers are "trading down" to lower-cost products and that firms are responding with more discounting
Nominal wage growth has continued to trend down. If this moderation in wage growth continues, it will soon be at levels consistent with price stability. The market-based services inflation measure I mentioned earlier tends to move closely with wage growth.
While I remain cautiously optimistic that inflation is coming down, it is still too high, and it is moving down only slowly. Policy has more work to do. It will likely become appropriate to begin easing policy sometime later this year.
The new speech is consistent with Kugler’s comments in April:
“If disinflation and labor-market conditions proceed as I am currently expecting, then some lowering of the policy rate this year would be appropriate”
My read
Kugler seems confident that inflation will get to the right place given a long list of “optimistic” factors both from the labour market and from the latest consumer supply-demand dynamics.
Kugler is also wary of the risks of overly tight conditions. It puts significant pressure on the lower-income households who have a greater need to finance their purchases but do not have the luxury of a robust stock portfolio.
Overall, Kugler seems keen to loosen the monetary policy at the earliest high-confidence moment to avoid a sharp economic downturn. I would put her in the “2-cuts” camp on the Fed Dot Plot.
Susan Collins, Boston Fed
This process [restoring price stability] may just take more time than previously thought.
It is too soon to determine whether inflation is durably on a path back to the 2 percent target.
We should not overreact to a month or two of promising news, just as it was not appropriate to take too much signal from the disappointing data at the beginning of this year.
The appropriate approach to monetary policy continues to require patience.
Collins said this in May:
“A slowdown in activity will be needed to ensure that demand is better aligned with supply for inflation to return durably…the recent upward surprises to activity and inflation suggest the likely need to keep policy at its current level until we have greater confidence that inflation is moving sustainably toward 2%”
My read
Collins essentially stresses that more time is needed to see a string of convincing data. This means she’s not thinking about the first cut in September, and likely just the one cut for the year in December, if at all.
Austan Goolsbee, Chicago Fed
It was an excellent inflation number after a few months of less excellent numbers so hopefully we'll see more like that.
We will get to 2% inflation.
There is still a little bit of "juice" left after last year's rapid inflation decline.
Goolsbee only shared his thoughts last week, so nothing new or surprising yet.
"Inflation was back down to levels that, if we got a lot of months like this, we would be feeling so much better”
My read
Goolsbee is among the more dovish members of the FOMC. His tonality suggests confidence and likely in the “2-cut” camp.
I really appreciate your support for this newsletter.
Please feel free to share any suggestions or comments, either directly through email or in the comment section.
— Yimin
DISCLAIMER: None of this is financial advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.
References
Kugler, June 18, 2024, Speech transcript
Collins, June 18, 2024, Speech transcript
Goolsbee, June 18, 2024, Discussion video and reported by Reuters
Barkin, May 6, 2024 at Columbia Rotary Club in South Carolina
Kugler, April 3, 2024 at Washington University in St. Louis.
Collins, May 8, 2024 at Massachusetts Institute of Technology event
Goolsbee, June 14, 2024 at Iowa Farm Bureau Economic Summit in Ankeny, Iowa