Torsten Slok, the chief economist at Apollo, joins a growing number of voices expressing skepticism about the possibility of the US witnessing a rate cut this year. In a recent blog post, Slok outlined his reasoning behind the Fed’s probable decision to maintain rates, emphasizing that the current state of the US economy does not warrant a reduction.
Sustained Economic Momentum
Slok argues that the US economy continues to exhibit robust growth, with expectations consistently being revised upward. This suggests a trajectory of reacceleration rather than deceleration.
Persistent Inflationary Pressures
Contrary to expectations of cooling inflation, Slok observes a trend of increasing underlying inflation, including measures such as supercore inflation, favored by Fed Chair Jerome Powell.
Tight Labor Market Dynamics
Highlighting the tightness of the labor market, Slok points to low jobless claims and persistent wage inflation ranging between 4% to 5%, indicating sustained pressure.
Price Hikes in Small Businesses and Manufacturing
Noting the intentions of small businesses to further raise prices and the upward trend in manufacturing prices paid, Slok identifies these as leading indicators for inflation.
Services Sector Indicators
Slok observes an uptick in prices paid within the ISM services sector, adding to the narrative of inflationary pressures.
Wage Increases on the Horizon
An increasing number of small businesses signaling intentions to raise wages further would tighten the labor market even more.
Escalating Housing Costs
The rising trend in rent and home prices contributes to overall inflationary pressures.
Favorable Financial Conditions
Contrary to expectations of tightening, Slok points out that financial conditions are still easing, indicating further economic strength. Examples include record-high investment-grade debt issuance, elevated high-yield issuance, robust IPO and M&A activity, tight credit spreads, and the stock market reaching new highs.
In conclusion, Torsten Slok’s analysis provides compelling reasons to believe that the Federal Reserve is unlikely to implement rate cuts in 2024. With the economy exhibiting signs of sustained strength and inflationary pressures persisting, the focus remains on maintaining stability and supporting growth.
