To cut or not to cut, that is the question

Fed Policy Debate: Trump Pressures Powell 

This week saw an important meeting between President Trump and the Federal Reserve (Fed) chairman, Jerome Powell. The topic of conversation wasn’t clear from the Fed’s post-meeting press release, but given how outspoken the president has been on the topic of rate cuts, it is likely that was his focus. Trump actually appointed Powell to his position during his first term and has expressed regret for that decision.   

Right or wrong, both have made their positions on rate cuts clear: 

• President Trump calls the chairman “Too-Late Powell”, indicating his belief that the Fed is holding rates too high for too long, keeping unnecessary pressure on the economy. He feels that the Fed is repeating the mistake it made by not raising rates to stave off the spike in inflation seen over the past couple of years.   

• In opposition to this view, Chairman Powell has reiterated that it is prudent to wait on confirmation that the tariffs won’t have lasting inflationary effects before cutting rates. The Fed believes that employment is strong, and inflation is still too high.   

This commentary has discussed the Bureau of Labor Statistics’ (BLS) likely overstatement of job creation in its monthly Jobs report. We have also discussed that inflation reports include lagging Shelter data, which may contribute to elevated inflation readings. 

Consumer Debt Hits Record High 

Consumers need rate relief. Total Household Debt sits at $18.2 trillion based on what is reported to credit agencies. Another $300 billion of unreported Buy Now Pay Later (BNPL) debt is estimated to be outstanding. As rates decline, this will provide relief from the high interest rates consumers are facing with this debt. 

Home Price Indexes: Prices Still Climbing 

Home values remain robust as evidenced by this week’s Case Shiller Home Price Index (HPI) and the Federal Housing Finance Agency (FHFA) HPI. FHFA is the agency that regulates mortgage giants Fannie Mae and Freddie Mac.  

• Case Shiller showed year-over-year increases of 3.4%  

• FHFA, which doesn’t factor in Jumbo or cash transactions, came in at 3.7% 

Homebuyers continue to get squeezed by high rates and higher home prices. As a reminder, new construction units remain significantly beneath Family Formations, which will continue to apply upward pressure on home prices.    

Fannie Mae Lowers Rate Forecast Slightly 

Thankfully, Fannie Mae lowered its rate forecast for the end of 2025 from 6.2% to 6.1%. But with rates still hovering at 7%, this seems very far off!   

Fannie & Freddie: Guarantee to Stay Post-Conservatorship 

Speaking of Fannie and Freddie, President Trump made an extremely important announcement that confirmed that when both entities exit conservatorship (they have been under direct government control since the 2008 mortgage meltdown), they will maintain a government implicit guarantee of their mortgage debt.   

This means they will effectively have the same risk classification as the government. This is great news for mortgage rates. There were fears that exiting conservatorship would increase rates when the guarantee was lost. 

PCE Shows Cooling Core Inflation 

Friday saw April’s Personal Consumption Expenditures (PCE) inflation report. This is the Fed’s favorite inflation gauge. The Fed has repeatedly stated that 2% of annual Core PCE is its goal.   

The report came out as expected and shows that inflation is tame. The Core rate differs from the Headline inflation rate by stripping out volatile food and energy prices. The Core rate rose 0.1% in April, and the yearly number fell from 2.7% to 2.5%.   

Shelter remains a sticky point in this report. Yearly Shelter costs show as 4.23% while a real-time report from Zillow showed that number as 3.2%. If the PCE report reflected this current Shelter number, Core PCE would be at 2.3%, almost to the Fed’s goal of 2.0%.   

Given the inflation report showing stable prices and the weakness in many of the economic reports coming out, leading economists are starting to emphatically call for rate cuts.  Dr. Lacy Hunt, one of the most respected economists in the US, believes that a 50 bps double cut is in store for us very soon.   

Looking Ahead 

Next week brings us to some important jobs data. 

• Tuesday: Job Openings and Labor Turnovers (JOLTs) 

• Wednesday: ADP Employment Report 

• Thursday: Initial Jobless Claims 

• Friday: BLS Jobs Report