US central bank policy action, reasons and implications

From the September 18 Fed FOMC meeting, we expected a 25bp rate cut and the start of a slow, measured, and deliberate unwinding of restrictive monetary policy rather than the beginning of a policy easing cycle. However, the Fed cut rates by 50bp, a bold and impressive move.

While it may provide some good optics, perhaps support business and consumer confidence, it should be viewed in the context of acknowledging that a pre-set course for monetary policy should not be presumed given the complexity of modern economies and the possibility of dramatic public policy shifts depending on the US
presidential election outcome. There could be solid tailwinds for the US economy in a Republican win, given the possible policy changes a 2nd Trump presidency will bring. At the same time, there is growing evidence of a generally slower global growth backdrop, given recent data from other large economies such as China, Japan and Germany¹ .

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Notes, Charts and References:

1. China's GDP growth rate Q2 at 4.7% y-o-y vs.5.1% expected and 5.3% Q1, Japan Quarterly GDP, Q1 -0.3%, Q2 1.8%, 3 Quarter Average at 0.733%, Germany with Q1 GDP at 0.2%, Q2 at -0.1% q-o-q, and many countries experiencing sub-50 manufacturing PMI data.

2. GDPNow – Federal Reserve Bank of Atlanta - The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, itdoes not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model. Latest estimate: 2.9 percent —September 18, 2024 - The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2024 is 2.9 percent on September 18, down from 3.0 percent on September 17. After this morning's housing starts report from the US Census Bureau, the nowcast of third quarter real gross private domestic investment growth decreased from 3.2 percent to 2.8
percent. The next GDPNow update is Friday, September 27.

3. ClevelandFed InflationNow - The Federal Reserve Bank of Cleveland provides daily“nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). Nowcasts are estimates or forecasts of the present. The Cleveland Fed produces nowcasts of the current period's rate of inflation—inflation in a given month or quarter—before the official CPI or PCE inflation data are released. These forecasts can help to give a sense of where inflation is now and where it is likely to be in the future.

Figure 1.

Figure 2.

Figure 3- Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate(U3) rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months.

This indicator is based on "real-time" data, that is, the unemployment rate (and the recent history of unemployment rates) that were available in a given month. The BLS revises the unemployment rate each year at the beginning of January, when the December unemployment rate for the prior year is published. Revisions to the seasonal factors can affect estimates in recent years. Otherwise, the unemployment rate does not revise.

Source: Sahm, Claudia, Real-time Sahm Rule Recession Indicator[SAHMREALTIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SAHMREALTIME, September 21, 2024.

Figure 4 - GDPNow

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our GDPNow forecasting model provides a "nowcast" of the official estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis.

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.

Figure 5– InflationNow

About Inflation Nowcasting
The Federal Reserve Bank of Cleveland provides daily “nowcasts” of inflation for two popular price indexes, the price index for personal consumption expenditures (PCE) and the consumer price index (CPI). Nowcasts are estimates or forecasts of the present. The Cleveland Fed produces nowcasts of the current period's rate of inflation—inflation in a given month or quarter—before the official CPI or PCE inflation data are released. These forecasts can help to give a sense of where inflation is now and where it is likely to be in the future.
Our inflation nowcasts are produced with a model that uses a small number of available data series at different frequencies, including daily oil prices, weekly gasoline prices, and monthly CPI and PCE inflation readings. The model generates nowcasts of monthly inflation, and these are combined for nowcasting current-quarter inflation. As with any forecast, there is no guarantee that these inflation nowcasts will be accurate all of the time. But historically, the Cleveland Fed’s model nowcasts have done quite well—in many cases, they have been more accurate than common benchmarks from alternative statistical models and even consensus inflation nowcasts from surveys of professional forecasters.

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