Everyday Economics: Just how many fed rate cuts are too many?

(The Center Square) – Retail sales surpassed expectations, rising 1.0% in July, and were up 2.7% from a year ago. Both initial and continuing unemployment claims fell again, indicating a resilient labor market. While this is good news, the significant decline in construction spending and housing starts may have reignited growth concerns.

Historically, housing starts have been an excellent predictor of changes in economic activity and business cycles. According to the U.S. Census Bureau, housing starts fell 6.8% in July and were 16% below last year’s level. Following the latest housing starts data, the Federal Reserve Bank of Atlanta’s nowcast of third-quarter real gross private domestic investment growth dropped from 0.0% to -2.4%. Residential investment tends to contribute most to economic weakness before recessions.

However, this time could be different. Builders, roofers, framing contractors, and even cabinet makers haven’t run out of work yet. There were more than 1.5 million homes under construction in July. While down from the pandemic peak, there are still more homes being built than anytime since the 1970s. Although residential building employment growth may be slowing, it remains high. Over the past year, construction sector hourly earnings grew by 4.3%, outpacing the 3.6% increase for all private-sector workers.

While the economy is slowing from a torrid pace, it remains in pretty good shape. Why? Lower inflation is a tailwind for households and businesses.

This week’s existing and newly built home sales data release is expected to show a slight improvement. However, a stronger-than-expected rebound wouldn’t be too surprising, given that wages are now rising faster than housing costs.

The Fed will also release the minutes of the July FOMC meeting, which will likely shed light on an increasingly divided committee.

Speeches by Fed officials, including the Jackson Hole Fed chair’s address, are likely to hint at the possibility that the first of many rate cuts could be just around the corner. However, even though inflation is moving in the right direction, the Fed is in no rush to lower rates – first, because economic growth remains strong, and second, due to uncertainty surrounding the neutral rate of interest, the real interest rate that is neither expansionary nor contractionary when the economy is at full employment. Although most central bankers agree that policy is currently restrictive, they are unsure how much to lower the policy rate to prevent it from becoming too accommodating.

So just how many rate cuts should we expect?

Markets still anticipate 3 quarter point rate cuts before year’s end and the Fed funds rate falling to the 3.50-3.75% target range by July 2025.