Central bankers do nothing. Markets respond

Episode Summary

Executive Summary: The episode argues that the market’s earlier expectation of multiple rapid Fed rate cuts has faded, and even one cut this year is now uncertain. Chris Giles and Katie Martin say incoming inflation data is noisy, forecasts are unreliable, and the Fed is likely to stay data-dependent until it sees durable progress on inflation or a clear labor-market slowdown. They also discuss ECB/Fed divergence, political considerations, and central bankers’ obsession with legacy.

Main Topics: Fed rate-cut expectations have collapsed (Priority: 5/5): Markets began the year expecting about six cuts, but the Fed’s latest signaling implies only one or two, with zero still plausible if data doesn’t cooperate. Inflation data remains volatile and hard to interpret (Priority: 5/5): A few good or bad monthly readings have swung expectations sharply, reinforcing the argument that one month of CPI is not enough to change policy. Central banking is increasingly data-dependent and uncertain (Priority: 4/5): The speakers emphasize that forecasts are best guesses, not promises, and that policymakers themselves are unsure about the durability of disinflation. Why forecasting inflation is harder after the pandemic (Priority: 4/5): Supply shocks, shifts in demand patterns, energy disruptions, and possible trade-war effects have made inflation forecasting more complex than in the pre-pandemic era. Timing of the first Fed cut: September looks plausible, July does not (Priority: 5/5): Chris Giles argues July is too soon because the Fed won’t have enough evidence, while September becomes possible if several more inflation reports are favorable. Politics and legacy shape central bankers’ behavior (Priority: 3/5): Officials publicly avoid election talk, but they care about reputational legacy and may prefer not to reverse cuts after starting them. Transatlantic policy divergence is not necessarily a major market problem (Priority: 3/5): Giles argues that lower European rates versus higher U.S. rates are less destabilizing than commonly feared, with currency effects likely overstated.

Key Arguments: The market’s early-year forecast of six Fed cuts was far too aggressive; the Fed itself has only moved modestly toward easing expectations. The Fed is likely to wait for a pattern of softer inflation, not act on a single good CPI release. A zero-cut outcome for 2024 remains possible if inflation data turns unfavorable again. Monthly inflation data can easily mislead; the May reading was excellent, but one month does not establish a durable trend. Forecasting is harder now because central bankers must assess both demand and supply shocks, not just spending strength. The ECB’s recent cut suggests some willingness to look through one bad inflation month, but it also shows discomfort and limited confidence. The Fed likely does not want to appear political ahead of the U.S. election, though timing differences between September and December would not be huge. Central bankers care deeply about legacy and want to avoid cutting rates only to raise them again later. Markets often overstate the risks of U.S.-Europe rate divergence and the resulting FX effects.

Data Points: Fed 2024 rate-cut outlook: 1 to 2 cuts - Latest Fed signaling described in the discussion Market expectation at start of year: 6 cuts - Markets were pricing aggressive easing early in the year Fed expectation at start of year: about 3 cuts - The Fed’s own earlier projection FOMC median expectation: 1 cut - Median among 19 committee members in the latest dot plot-style projections Committee members favoring 2 cuts: 8 of 19 - Shows the committee is split between one and two cuts May US headline CPI monthly change: 0.0% - Prices were flat in the month of May May US core CPI monthly change: 0.16% - Ex-food-and-energy inflation, annualized to roughly 2% Fed inflation target: 2% - Core May CPI was said to be effectively at target on an annualized basis US unemployment rate: 4% - Used as evidence the labor market is still relatively strong Payrolls: Very strong - Latest jobs data cited as inconsistent with an imminent labor-market collapse ECB rate move: Cut this month - Used as an example of acting despite mixed inflation data UK exam timing: Roughly 4:30 p.m. on Friday - A humorous aside about avoiding parks due to students finishing exams

Pivotal Quotes: "zero as we started the show is perfectly possible" — Chris Giles: On whether the Fed could end up delivering no rate cuts this year "We just don’t really know" — Chris Giles: On why inflation forecasting is so difficult in the post-pandemic economy "Legacy is absolutely everything to them" — Chris Giles: On how central bankers think about their reputations and policy decisions

Implications: Listeners should expect more uncertainty and fewer guaranteed rate cuts than markets once hoped. The Fed may wait until autumn, and policy decisions will continue to hinge on a handful of inflation prints rather than a fixed easing path.