Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / Fed Rate Cut Odds as Consumers Keep Spending
Transcript
- Lucas: The Dow Jones Industrial Average closed above 50,000 for the first time this week. Fifty thousand, two hundred and eighty-six points as of yesterday. And the S&P 500 is sitting at 7,446. Luna: Pretty remarkable headline number. But underneath that, there's a lot of noise about what the Fed does next. Lucas: Exactly. Because on the same day the Dow hit that milestone, Kevin Warsh was sworn in as the new Fed chair. His first FOMC meeting is June 16th, and markets are pricing in a rate cut by September. Luna: Right. The CME FedWatch tool is showing about a 60 percent chance of a cut in September. But Warsh hasn't exactly been dovish in his public comments. Lucas: Not at all. And here's the tension: the economy is still growing, consumers are still spending, but inflation isn't all the way back to 2 percent. Core PCE for March came in at 129.3, up from 128.9 in February. That's still above target. Luna: So the market is expecting cuts, but the data doesn't really support it yet. What gives? Lucas: Look, part of it is the lag effect. The economy is slowing, but it's slowing from a very high base. Retail sales in April were still up 3.1 percent year-over-year. But the breakeven inflation rate — that's the market's expectation for inflation over the next 10 years — has actually fallen to 2.39 percent from 2.44 a month ago. Luna: That's a meaningful drop. The bond market is basically saying inflation is coming down, even if the official data hasn't fully caught up. Lucas: Right. But here's the thing the market might be underestimating: the new Fed chair. Kevin Warsh was a Fed governor during the financial crisis. He's known for being inflation hawkish. And he's coming in at a time when the bond vigilantes are already circling. Luna: Bond vigilantes — you mean investors who sell bonds to protest fiscal or monetary policy? Ed Yardeni just said the Fed might have to hike in July just to appease them. Lucas: Exactly. Yardeni wrote that the Fed will have to raise rates in July to maintain credibility. Now, I'm not sure a hike is likely, but the fact that it's being discussed tells you how uncertain the path is. Luna: So you've got the Dow at 50K, consumers spending, but the new Fed chair might have to keep rates higher for longer. What does that mean for the average worker? Lucas: It means the cost of borrowing stays elevated. Mortgage rates, credit card rates, auto loans — they're all still high. Average hourly earnings in April were 37.4 dollars, up from 37.35. That's a 4.2 percent annualized gain, but it's being eaten by rent and services inflation. Luna: Right. So wages are rising, but real purchasing power isn't improving much. The CPI for April was 332.4, up from 330.29 in March. That's about 2.3 percent annual inflation. Lucas: But core CPI — excluding food and energy — is still running at 2.7 percent. That's the number the Fed watches most closely. And it's stubborn. Luna: So the market is betting on cuts, but the data says inflation isn't beaten. Something's got to give. Lucas: And that something might be the Fed's patience. Warsh has already signaled he wants to see more progress before easing. His first press conference will be closely watched. Luna: What about the consumer? If rates don't come down, how long can spending hold up? Lucas: That's the big question. Consumers have been resilient, partly because the labor market is still strong. The employment cost index for wages rose to 177.5 in the first quarter, up from 176.23. That's a 3.1 percent annual gain. Luna: But that's slower than the 4 percent gains we saw in 2022 and 2023. Wage growth is decelerating, even if it's still positive. Lucas: Yes. And when wage growth slows but inflation stays sticky, real wages get squeezed. That's the scenario that worries me. Luna: So the Dow at 50K might be a bit of a mirage. The stock market is forward-looking, but the economy is still dealing with high rates and sticky inflation. Lucas: Exactly. And I think the key number to watch is the breakeven inflation rate. If it continues to fall, that gives the Fed cover to cut. But if it stabilizes or rises, Warsh will have to hold the line. Luna: What about the international side? The headlines this week are all about trade deals and energy geopolitics — uk gulf deal, Putin-Xi talks on Russian gas. Do those affect the Fed's calculus? Lucas: Indirectly, yes. If energy prices spike because of geopolitical tensions, that feeds into inflation, which makes the Fed's job harder. But the direct impact on U.S. monetary policy is limited. The Fed focuses on domestic data. Luna: Still, it's a reminder that the global environment is uncertain. And uncertainty usually makes central banks more cautious. Lucas: Absolutely. And that caution is exactly what the bond market is pricing in — but in the opposite direction. The market wants cuts; the Fed might want to wait. Luna: So what's your take? Will we see a rate cut in 2026? Lucas: I think we'll see one, but not until the fourth quarter. The economy is still growing, inflation is still above target, and the new chair wants to establish credibility. Cutting too soon would risk repeating the 1970s mistake. Luna: And if they don't cut, what happens to the stock market? Lucas: We might see a correction. The Dow at 50K is priced for perfection. If rates stay higher for longer, valuations will have to adjust. But that's not necessarily a bad thing — it just means the economy is stronger than we thought. Luna: It's a good problem to have, I suppose. Strong economy, sticky inflation, new Fed chair — it's going to be an interesting summer. Lucas: It will be. And I think the key is to watch the data, not the headlines. The next CPI and PCE prints will tell us a lot about whether the market's rate-cut hopes are justified. Luna: And whether Kevin Warsh has to pick up the phone to the bond vigilantes. Lucas: Exactly. Something tells me he already has their number on speed dial.