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Markets rallied to new record highs last week and the Dow crossed the 40,000 level for the first time in its 139-year history after inflation cooled for the first time in months, stoking hopes that the Federal Reserve could start cutting interest rates as soon as September.
Fed officials tamped down some of the excitement during a full slate of public appearances where they repeated that inflation was still too high for their liking. So will the central bank lower interest rates or not this fall? That’s the billion dollar question.
Before the Bell spoke with Tom Porcelli, chief US economist at PGIM Fixed Income, about what happens next and what it could mean for the economy.
This interview has been edited for length and clarity.
Did you think markets reacted appropriately to last week’s cooling inflation data?
It’s interesting to me that the equity market is cheering the idea that the Fed is going to be cutting rates. If the equity market is cheering the fact that the Fed is going to extend the current economic cycle by cutting rates a couple of times, I would agree with that. I just think we have to be careful. There tends to be a fine line between cutting rates and extending the economic cycle or cutting rates because the cycle is coming to an end (and the economy is softening). All investors are really going to have to grapple with that in the coming months. Our view is that you start cutting now and you actually can extend the cycle.
What do you mean exactly by extending the cycle?
When the Fed is cutting rates, it’s cutting rates because a recession is about to happen, right? That happens almost every single time where the Fed is cutting and recession is upon us. That’s why I say there’s a fine line between the Fed cutting to extend the cycle and the Fed cutting because a recession is about to happen. You really are threading a needle here.
The Fed has been in this precarious space where they’re trying to avoid recession while lowering interest rates. How have they done in shaping a narrative around that?
I think you have to go back to last July. We were at 4.2%, from a core inflation perspective, that’s more than double the target rate. But the Fed decided that they were done with this hiking cycle. So when you hear about the dovish pivot that happened in December, it didn’t happen in December, it happened in July.
(Fed Chair Jerome Powell) was taking a bit of a risk there, but part of why he shifted is because he recognized that the more aggressive the Fed goes from there, the greater damage they could do to the labor backdrop. He kept on highlighting in subsequent meetings that we cannot wait for inflation to get to 2%. Because then we run the risk of doing much more economic damage.
He has tried to present themselves as a hawk. But in the end, I think Jay Powell is actually more of a dove. A lot of his actions, going back to July, are really consistent with that. I have a lot of sympathy for what he’s trying to do. He’s trying to engineer that ever elusive soft landing and I think he could succeed. When it comes to inflation, he can’t take his eye completely off the ball, but I know that labor is top of mind right now.
Do you still think the Fed will cut rates in September?
If we’re right that Powell’s inclination is to cut, September is in play. And if we get a string of better inflation data between now and September, I don’t doubt for a second that September is in play.
How does the November election come into play?
If you go back and look over the past 10 election years, it becomes clear that the Fed does adjust policy during election years. Full stop. So I think it’s very fair to say that the Fed will respond to the economic reality on the ground and if the economic reality demands that the Fed adjust rates, even in an election year, even in an election month, the Fed will do it because the Fed has always done it.
What happens if the Fed doesn’t cut?
The longer we see no cuts, the greater the risk is that you see many cuts later. There are already some signs that the economic backdrop is already weakening. You can look at rising consumer delinquency rates as an example of how higher rates are starting to clamp down again.
From a corporate perspective, companies are now in the midst of refinancing. They’re hitting a maturity speed bump with their debt. They’re refinancing at 1 or 2 percentage points higher than where they were pre-pandemic. That could feed through to the broader economic backdrop. Right now, we have a consumer that’s hanging in there, but they’re starting the process of slowing their spending. That means that you’re going to start to see some potential for margin compression.
If you start to see margins compress in companies that are now refinancing at higher rates, you can exacerbate things.
And so what do companies do? How do companies tackle margin compression, particularly if they’re not able to pass on costs to the same extent that they were in recent years? They do three things. From a labor perspective, they go after hours — hours are being cut right now. If that’s not enough, they try to lower wages, they’re doing that right now, too. And if those two things are not enough, then the last thing you do is you go after headcount. That to me is the risk if the Fed doesn’t cut anytime soon.
Disneyland character performers vote to unionize
You can add Mickey, Minnie, Donald and Goofy to the growing list of workers seeking better employment benefits, reports my colleague Eva Rothenberg.
After three days of voting last week, 1,700 Disneyland Resort cast members who play characters around the theme park in Anaheim, California, as well as perform at parades, voted to unionize under Actors’ Equity Association, the union announced Saturday night.
Equity described the vote as “a landslide victory,” with 953 cast members favoring unionization and 258 opposed.
The group had announced a union organizing effort in February before filing for a vote with the National Labor Relations Board in April. There are more than 21,000 Disneyland “cast member” employees, who are represented by more than a dozen unions. Those unionized jobs include workers in retail, food service, security, pyrotechnic, and hair and makeup.
Until now, employees dressing up as iconic Disney characters like Mickey Mouse, Cinderella, Snow White and Captain Hook have been excluded.
“These workers are on the front lines of the Guest experience; they’re the human beings who create lifelong memories when your kids hug a character, or when your family watches a parade roll by the castle,” said Actors’ Equity Association President Kate Shindle in a statement. “The next step will be to collaborate with them about improving health & safety, wages, benefits, working conditions and job security.”
The labor relations board is expected to certify the results next week, after which contract negotiations with The Walt Disney Company will begin. Equity said it does not know how long the bargaining process will take, adding Disney has been “relatively cooperative throughout this process.”
Minnesota government officials have struck a deal with rideshare companies Uber and Lyft to set minimum wage standards for drivers, lawmakers announced Saturday night.
The agreement is the culmination of nearly a year of back and forth between Democratic state officials and the two companies, who threatened to withdraw their businesses from Minnesota over a proposed Minneapolis ordinance that would grant rideshare drivers increased worker protections.
The ordinance, initially adopted in August 2023, was part of a larger effort to grant more comprehensive benefits to contract workers, who take freelance work at digital platforms like DoorDash, Instacart, Uber and Lyft. It mandated drivers be paid at least $1.40 per mile and $0.51 per minute.
The rule was delayed after Lyft and Uber warned they would leave Minneapolis. State lawmakers have been focused on compromising with the companies before a July 1 deadline.
Under the new agreement, the statewide minimum wage rate for rideshare drivers will be $1.28 per mile and $0.31 per minute. The rule will override the higher rate the Minneapolis City Council had initially proposed.
“When you take it as a blended rate, that results in a 20% increase in pay for drivers in the state of Minnesota,” the state’s Democratic House Majority Leader Jamie Long told reporters Saturday night.
Read more here.
