Yahoo Finance June still feels a little too soon for a rate cut: Neil Dutta
With lackluster May jobs report fueling the odds of the Federal Reserve easing monetary policy, one top economist is slamming the brakes on the idea of a rate cut.
According to Neil Dutta, head of economics at Renaissance Macro, the June-July timeframe still feels a little too soon for a rate cut.
“Our reading of the Fed’s reaction function is that this is not enough for the Fed to cut in June though we could see some change in guidance,” Dutta wrote in a note to clients. “We tend to think September as more likely than July, only because we see room for jobs to look a bit healthier over the summer.”
The U.S. economy added 75,000 new jobs in May, missing economists’ expectations of 175,000 jobs and dipping below the 100,000 mark for the second time in four months.
The jobs data sent the Dow jumping above 26,000 for the first time in 4 weeks on Friday, with the Fed Funds futures pricing in a 90% chance of a July rate hike, up from a 68% chance on Thursday.
Still, Dutta points out that when the Fed’s easing cycle does come, it will be a muted one aimed at nudging the economy up to offset the downside risk, rather than to backstop an economy already in the throes of recession.
“Right now if they cut, it’s primarily an insurance policy,” Dutta said in an interview with Yahoo Finance The Final Round. “They can’t actually cut based on economic data because it’s basically in-line with their forecast. If they think things are getting so bad that they think the forecast is deteriorating, they can cut in front of the data - but they haven’t made that indication either. “
The disappointing jobs data also adding to recent market fears of a looming recession, which could further prompt the Federal Reserve to act on rates. However, Dutta argues that we aren’t actually seeing a lot of recessionary indicators right now and slower growth has already been priced in by both the Fed as well as the market.
“What’s important to recognize is that the Fed was expecting slower growth, and the consensus was expecting slower growth going into the year,” said Dutta on the Yahoo Finance’s The Final Round. “And there’s nothing in the data to suggest that we’re seeing anything beyond that.”
Instead, Dutta is zeroing in on the health of the consumer, which to him is the best indicator of the health of the U.S. economy.
“To me the most important thing is that the household’s balance sheet is expanding and moving out to the right. And basically what that means is that labor income —jobs, hours and earnings — is rising faster than the rate of inflation. So long as that’s happening, it’s very difficult to see a recession.”
Read more:
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