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Speed read:

• Expect the U.S. Federal Reserve (FED) to start interest rate cuts in September.
• Higher-than-expected inflation in the first quarter of 2024 reinforced the Fed’s caution and pushed back the rate cuts, initially anticipated for July.
• Slowing inflation in the second half of the year should give the Fed confidence to move.

Investors, consumers, and business leaders have been closely tracking the FED’s interpretation of economic data. FED chairs waiting for the moment when the economy has slowed enough to allow it to cut interest rates for the first time since it began raising them in March 2022. So far, there was little seen in absolute terms: Recent data has shown that economic growth has remained strong, job growth is vibrant, and wage growth is powering ahead. More important, inflation continues to be stubborn, with a surprising upswing in the price of goods and services in the first few months of the year.

However, despite the first-quarter reacceleration in inflation, price increases should start to slow down as the second half of the year begins, clearing the path for rate cuts. The Fed is expected to be in a good position to start a new cycle in September.

Two factors analysis:

Easing price pressures:

It is expected price inflation in these areas will start to ease, and that rent and car insurance, in particular, will continue to come down. The data over the summer should start to give the Fed more confidence to begin whittling rates starting at the September Federal Open Market Committee meeting.

Coming slack in jobs and growth:

But recent jobs data hint at a softening trend, with weaker hourly earnings, higher unemployment and lower-than-expected payroll prints for April. Demand for workers appears to be slowing and uncertainty over future job prospects is likely to keep employees in place. Fed Chair Jay Powell has indicated material weakening in the labor market would be a reason to trim rates, and Morgan Stanley believes the unemployment rate this year will increase more than the Fed expects, ending at 4.2%. The coming jobs data should support our view for a September start to rate cuts, with two additional cuts in November and December.