Rate cuts won’t arrive in March, May, or even June this year. Instead, they’re going to come after the 2024 election.
That’s according to Santander’s chief economist Stephen Stanley, who expects only two rate cuts this year, for a total of just 50 basis points.
“The underlying inflation piece is not as good, I think, as the numbers would suggest,” he told Bloomberg on Thursday.
The last few inflation prints have infused investors with hope that the economy is on track to cool down after a dizzying spell of price increases. But according to Stanley, inflation numbers won’t look as strong this year as they were toward the end of last year.
“We’ve had six months now of the core PCE deflator running a little below 2%,” he said. “And I’m sure there are a lot of frustrated market participants saying ‘Well, isn’t that enough?’ And the answer is no.”
That’s because “noisy” categories like airfares, hotel rates, and used car prices have been pulling inflation down so far, he said.
But there’s a political reason, too. If the Fed begins cutting rates now, the risk of looking biased toward any presidential candidate is low. But introducing the first rate cut closer to election day is trickier, and could be construed as a boost to incumbent president Joe Biden.
“I don’t think they want to make newspaper headlines in the heat of the election season,” Stanley said.
While sticking to a pause could also be interpreted as a leg up for Biden’s competition, which increasingly looks like it will be Donald Trump, cutting rates after the election is less controversial.
“They’re damned if they do, and damned if they don’t,” he said. “But I would say, in my view the political risk is much lower after the election than it is before.”
And Stanley argued that based on their comments at the January meeting, the Fed doesn’t seem close to being convinced about an early rate cut. Jerome Powell’s comments were less dovish than markets were hoping for, spurring a stock sell-off on Wednesday.
“Based on what they said yesterday, even a May rate cut would really require some pretty stellar inflation data over the next few months,” Stanley said.