Citi’s Chief U.S. Economist Says ‘Sticky’ Services Inflation Could Prevent the Fed From Cutting Rates Until Late Next Year

Overview of Economic Data and Inflation

Earlier today, Andrew Hollenhorst, Citi’s Chief U.S. Economist, joined CNBC’s “Squawk on the Street” to provide an analysis of the current economic data and its implications. He discussed the concept of a ‘Goldilocks’ economy, the potential for stickier inflation, and the timeline for achieving target inflation rates.

Current Economic Data: A ‘Goldilocks’ Scenario?

Hollenhorst described the current economic data as indicative of a ‘Goldilocks’ scenario, with moderating activity and cooling inflation. However, he cautioned that this might be a short-lived phase. Looking ahead to the next year, he anticipates more complexity, with potentially stickier inflation and slower growth.

The Issue of Stickier Inflation

The economist noted that while goods inflation has significantly decreased, services inflation remains somewhat sticky. He pointed out that this trend might not be consistent, as some months may show better readings than others, leading to more volatile inflation overall. This volatility is a concern for the coming year.

Reaching Target Inflation by 2025

When asked about reaching the target inflation rate by 2025, Hollenhorst expressed that it might be achievable, but likely through a scenario involving a recession. He emphasized concerns about higher inflation, particularly in the services sector and housing, where prices continue to rise rapidly.

Federal Reserve’s Future Rate Cuts

Discussing the Federal Reserve’s actions, Hollenhorst suggested that the Fed is probably done with rate hikes, as indicated by their recent rhetoric. He believes that any future rate cuts by the Fed will depend more on activity data than inflation data. He speculated that if core inflation runs down smoothly, the Fed might consider cutting rates late next year. However, he thinks it’s more likely they’ll wait for signs of weakening in the activity data.

Job Growth and Economic Indicators

Looking at job growth, Hollenhorst predicted that by the middle of next year, there might be negative readings in job growth. He noted early signs of slowing, such as rising continuing jobless claims and an increasing unemployment rate. However, he also expects a strong jobs report in the near term, with the actual slowdown not appearing until around mid-next year.

Corporate Debt, Interest Rates, and Household Mortgages

The interview also touched on corporate debt and interest rates. Hollenhorst mentioned that many treasuries have locked in decent rates, and there’s a divergence between households with fixed-rate mortgages and those who are renting. He highlighted the resilience to higher rates due to people locking in lower rates, both at the individual level through mortgages and corporates through longer-term borrowing.

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