We expect the FOMC to pause rate hikes as the committee believes that the Trump administration’s policies will be inflationary due to tariffs, immigration and tax cuts. We, however, strongly disagree with the Fed’s view as tariffs are deflationary in the long run due to a stronger dollar offsetting the tariff increases and revenue from the tariffs reducing the deficit and increasing capital available for investment. Deporting criminals is not inflationary, and even if some hard-working illegals are deported, it is unlikely to significantly increase inflation as there is a developing surplus of low wage workers due to minimum wage hikes and associated automation.
We are forecasting core PCE rolls down to below 2.4% after the first quarter as shelter inflation finally reflects the reality of declining market rents and we roll off very high prints that occurred in the first quarter of 2024. We also forecast that the housing and auto markets will continue to soften if the 10-year remains above 4.5%. The combination of slowing inflation and decelerating growth should clear the way for 3-4 Fed rate cuts this year. We do not expect the Fed to signal these cuts at this month’s meeting as this Fed has no demonstrated ability to accurately forecast inflation or the economy.
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