Fed won't hit 2% target until 2026: Economist

With somewhat cooling inflation and stagnant labor market growth, conversations about whether the Federal Reserve's interest rate cut timing persist. Interactive Brokers senior economist José Torres joins Market Domination to give insight into the labor market, the broader stock market, and the Fed's future policy decisions.

"I think we're going to hit the Fed's 2% target somewhere in 2026. Fed Chair Powell was asked about it; he didn't think that we would hit it this year or next year. In fact, when we consider the disinflation that occurred last year in the second half, now those base effects become unfavorable into the second half of this year. So we're going to actually see core PCE start to tick higher. And if you look at the dots of summary of economic projections from the Fed, they're expecting core PCE to finish the year around 2.8," Torres tells Yahoo Finance.

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This post was written by Nicholas Jacobino

Video transcript

Well, investors, I just see a fresh batch of a labor data ahead of the key jobs report on Friday, the private sector adding less jobs than expected in the month of June while continuing jobless claims rising for 1/9 week in a row here with more on what this means for the labor market in the Fed.

We want to bring in interactive brokers.

A senior economist, Jose Torres Jose, it's great to see you here.

So we have the latest jobs number really pointing to the fact that maybe we are seeing this cooling happening within the jobs market.

We also had the services PM I print out a couple of hours ago pointing to maybe some weakness there.

I'm curious how you're looking at this and, and, and really what this tells us ultimately, maybe about the feds next move or how the fed is evaluating this data.

Great to be here, Shana, thanks for having me.

Well, I think that the labor market is slowing but corporate balance sheets are really robust and employers are under no pressure to begin to lay off employees.

However, continuing claims just went up to a 32 month high.

And as far as ISM services is concerned, consumer spending has been really erratic.

In certain months, we saw the same result in April an abrupt weakening.

Then in May, we recovered back into expansion territory only to dwindle again.

So consumer spending has been erratic, particularly amongst lower and middle end in uh income consumers.

Now financial markets have also supported consumer spending.

So I think that the labor market and rising paychecks alongside financial markets being so robust, that's really supported a consumer spending as far as the loosening in financial conditions that's occurring.

I think that's going to support inflationary pressures further later this year.

And it's going to make it quite difficult for the fed to cut in September.

Although we are going to have two consecutive cool inflation reports, we got the one from May, the one from June next week is also going to be cool.

But then that leaves us with July and August before the September meeting, which I think is going to come in a little hot, particularly as oil prices are at a two month high on heightening geopolitical tensions.

So, so Jose, when do you think you actually hit that the Fed's 2% target?

I think we're gonna hit the Fed's 2% target somewhere in 2026.

Uh You know, uh Fed Chair Powell was asked about it.

He, he didn't think that we would hit it this year or next year.

In fact, when we consider the disinflation that occurred last year in the second half.

Now those base effects become unfavorable into the second half of this year.

So we're gonna actually see core PC start to tick higher.

And if you look at the dots, the summer of economic projections from the fed, you know, they're expecting core P CE to finish the year around 2.8%.

If we do get a little bumps on the road, we could be at 2.9% or 3%.

Jose.

I think we, we spend so much of our time talking about when the fed is going to cut exactly what that short term trajectory or timeline really looks like.

But when you take a look at the longer term, right, there's lots of questions about what is going to be that new normal, what exactly the longer term neutral rate is?

And you have the feds, John Williams out defending the All Star model.

Not exactly a surprise there.

But I'm curious, do you think how much has the economy changed post COVID?

And when you take a look at the longer term neutral rate, maybe what more, what do you expect that to look like?

Well, so I think we're gonna be in the high threes and the low fours.

I've been telling uh folks that the short end of the curve is particularly attractive because I don't think the fed has much room to cut without reigniting inflationary pressures when we consider the shift from globalization to regionalization alongside deficit financing, which is not just occurring here in the states, it's occurring, it's a phenomenon going on all around the world.

You know, that's really propelling inflationary pressures.

In fact, we've been seeing a move long end of the curve and 10 year yield.

You were talking about it earlier heading up to 4.5% even with economic data, that's been surprising to the downside.

And I think that's the market telling you that at the longer end of the curve, there are going to be some concerns.

So again, I guess the question is if the long end of the curve is going to be, you know, call it at the bottom 3.5 perhaps, then how low can the fed funds rate go?

Uh, you know, we have to stay above three.

Certainly.

I think in this new economy, I'm curious, Jose just given your, your overall impressions of the economy and the labor market get your views too on the consumer.

Where, where do you think the consumer is now?

And, and where are they headed?

Well, Josh, wealthy consumers are doing great.

They have several homes.

They're, they're appreciating in value.

Their 401 Ks are going up, their investment portfolios are doing great middle and lower income consumers, however, aren't doing phenomenal.

They're doing all right.

They're hanging in there.

They have jobs, their wages are growing, but it's not proportionate with how well the wealthier folks are doing.

So that's where we're starting to see some significant cracks.

Y'all were talking about it earlier with uh restaurant sales and trans actions.

We saw it today in ISM Services, you know, and I think that's really what's going on with the lower and middle end consumer.

They're managing their budgets like a light switch.

Ok?

We spent a lot in May, let's slow it down in June and then we'll come back in July, you know, so that's really, but as that erratic this begins to increase, I become concerned that maybe we really are at the end of the consumer spending expansion, Jose, always great to have you on the show.

Thanks so much for joining us today.

My pleasure.

Thank you.