Due to resurging in the past three months, plus higher in the wake of the May payroll report, any Fed key cut will likely be postponed until transitory inflation cools later this year.
Speaking of inflation, Treasury Secretary Scott Bessent on Wednesday told the Senate Finance Committee that he expects inflation to be a “short-term blip.” Bessent also said that “the economic data is very strong.” Our new Fed Chairman, Kevin Warsh, is a big proponent of AI productivity growth and is expected to strive to convince other members of the Federal Open Market Committee (FOMC) that AI-related productivity gains are not inflationary.
Energy prices are expected to decline no later than the fall, since worldwide seasonal demand for drops in the fall. Although high transportation costs (e.g., diesel and airfare) have caused wholesale goods and service costs to rise, the Fed knows that it cannot control energy inflation, so I still expect the Fed to stay on course with another key interest rate cut later this year.
In the meantime, deflation from weak economies around the world is expected to re-emerge. It appears that the European Union (EU) may be teetering on slipping into a recession, since retail sales declined 0.4% in April. Higher energy prices are apparently curtailing consumer spending in the EU. The European Commission analysis concluded that around 560,000 EU jobs could be cut this year due to the energy costs, while around 600,000 jobs are under pressure in the automotive industry. It is very hard for the EU to grow when they are about to lose over one million jobs, so a recession may be imminent.