Macro Briefing: 3 September 2024

US consumer sentiment ticked up in August, marking the first rise after four straight monthly declines, according to the University of Michigan’s survey. “Consumers’ short- and long-run economic outlook improved, with both figures reaching their most favorable levels since April 2024 and a particularly sizable 10% improvement for long-run expectations that was seen across age and income groups,” writes Surveys of Consumers Director Joanne Hsu.
The improvement follows a stronger rise in US personal consumption expenditures in July, the Bureau of Economic Analysis reports. Consumer spending increased 0.5%, picking up from June’s 0.3% advance.

PCE inflation was stable in July, indicating a pace that’s close to the Fed’s 2% target, the Bureau of Economic Analysis reports. The news strengthens expectations that the central bank will cut interest rates at this month’s policy meeting on Sep. 18. “In some ways, it was the best possible increase to the PCE,” says Tani Fukui, an economist at MetLife Investment Management. She notes the absence of upside surprises for services inflation. “That was more the Fed’s concern and that did not produce a concern.”
The outlook for rate cuts persuades some investment strategists that a higher weighting for bonds is timely. “Rates are likely to settle at or closer to what is known as the neutral rate, or r-star, the level that neither stimulates nor restricts the economy,” writes Jumana Saleheen, chief economist and head of investment strategy group at Vanguard Europe. “Importantly, although rates will fall, they will not end up as low as they were prior to the Covid pandemic. We are entering a new regime where bonds offer greater value in a portfolio.”
An update of TMC Research’s Fed funds rate model suggests that the odds have increased for a 50- basis-points cut. “The model’s current estimate for the optimal (neutral) Fed funds rate is roughly 3.8%, which is sharply below the current 5.25%-to-5.50% target range. Our revised 3.8% estimate fell abruptly from 4.8% in our July 9 research note (“Is The Fed Risking A Recession By Not Cutting Interest Rates?”). Although the Fed’s process for setting rates is far more nuanced than any one model can capture, the slide in the optimal rate via TMC’s model suggests there’s a stronger case that the central bank will cut more than 25 basis points.