First quarter GDP figures were softer than expected, rising 3.0% compared to analysts' anticipated 3.1%. However, investors may wonder what this number means for future Federal Reserve rate cuts. Wolfe Research Chief Economist Stephanie Roth joins the discussion to provide insights into the Fed rate cut outlook.

Roth notes that this GDP figure proves rates are impacting the economy, "and that's what they are supposed to be doing." She adds that this economic dynamic will allow the Fed "to start easing financial conditions" later this year. While the economy is cooling, it is "still healthy," which could pave the way for a rate cut to materialize by September.

For the Fed to feel comfortable cutting rates, Roth mentions that it will likely need to see three consecutive inflation prints that demonstrate progress on inflation. She also notes that core PCE should trend near 0.2% "for at least two more months for the Fed to feel comfortable cutting rates in September."

However, with the April core PCE data set to be released tomorrow, Roth says, "It's going to be really hard to get a big surprise tomorrow."

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This post was written by Angel Smith

Video Transcript

Some of the latest readings that we're getting for first quarter GDP growth there.

The price index came in a bit softer, rising 3% versus the 3.1% that was expected as part of that report.

Now this is coming as consumers continue to pull back on spending on goods in certain areas.

So what does this mean for the overall inflation picture?

We've got a good friend of the show.

Stephanie Roth Wolf research, chief economist here, live in Living color.

Stephanie.

Good to see you here this morning.

Good to be here.

OK.

So let's just get your read on this kind of broad strokes from the, the GDP revision.

This is the second revision that we've got.

There's still a third that's late to come.

Uh But what is your read?

Yeah, I mean, so what we got today is we learned that consumption came in lower than what was initially anticipated.

The the market kind of knew that it just was even a little bit slower than that.

And that all came from largely from durable goods.

So that's also tied to this whole interest rate perspective is that rates are actually starting to have an impact across parts of the economy and that's what they're supposed to be doing.

So, our base case is that the FED is gonna gonna be able to start easing financial conditions later towards this year because we are starting to see an impact from, from higher rates.

The economy is starting to cool down.

Meanwhile, it's still healthy.

We're not expecting a recession.

We expect that the FED can be nimble here.

And if they start to see real signs of weakness, we start to see inflation coming back down towards the fed's target.

The fed can be cutting by September.

But how much improvement do they need to see in order to feel comfortable with cutting?

So our base cases you'll probably need to see AAA trend of three prints that are in, in line with their expectations, something like.

And we're watching Core P CE here, which is in, in part, the data that we got today, we're gonna get more information tomorrow because we're gonna get the April read today.

We just got data through March.

We need to see Core P ce trending something close to 0.2% month on month tomorrow.

We'll probably see something like 0.25% that's a little bit high, but definitely better than what we've seen in the past couple of months.

And what we'll need to see going forward is something like 0.2% for, for at least two more months in order for the Fed to feel comfortable cutting rates in September, you, you've been tracking the same way we have, especially with the fresh reading on the housing market that we got here today, how the Fed is looking into all of this too and where they're going to be looking across all of the homeowners equivalent rents where people are still paying either higher rent or more elevated rents historically versus paying to buy a home right now.

What is their evaluation from, from your purview and how that is kind of continuing to be an outsized impact here on the inflationary picture.

So, affordability is a problem, right.

That's what we're seeing today is that people just people in terms of pending home sales being so weak, it's, it's really hard for people to go out and buy a house and trade the mortgage rate.

That's 3.5% for something that's close to 7% like that trade just doesn't make sense.

And until rates come down, it's just gonna be unattractive and by down, I mean, something like 50 to 75 basis points lower would, would probably spur a decent amount of demand.

And we saw signs of that earlier this year when rates had actually fall fallen at least a little bit.

Heading into 2024 you started to see a little bit more demand and our base cases, you need to see something like that in order to, to make people feel a little bit more comfortable uh in terms of buying as for rent inflation.

It's kind of interesting because o is still a problem in the, the CP I basket.

But real time measures of rent inflation have actually started to cool down.

And the FED has talked about this quite a bit that we're looking at market rents as opposed to what's measured in CP I, which is really lag measure.

So rent inflation is actually cooled quite a bit.

The thing is we're talking about level versus rate of change here, right?

So the the prices are not gonna fall in the economy.

Generally speaking, that doesn't happen unless you have a recession.

So our base case is you're not gonna have following actual falling prices of rent.

But if you start to see the, the inflation rate cool down, that's at least a good thing for the feds looking for if we do see a hotter than expected P ce print tomorrow, is that enough to take a rate cut, at least in September off the table or I, I guess at what point does that kind of change?

Some of the discussions surrounding that first rate cut?

It's gonna be really hard to get a big surprise tomorrow.

So the, the fed is tracking somewhere between 24 and 26 basis points on CO P ce we're looking for 0.25% and to get a, an actual beat which would mean, you, you need to get something that rounds up to a 0.4%.

You would need a massive like that.

That to me would be incredibly surprising.

So sure that would take a potential September cut off the table.

But the, the odds of that are fairly low, it's likely that the number will round to, to 0.3% or even if you get a little bit lucky 0.2%.

And then after we get the first cut from the fed, what does that pacing look like from there on out?

Probably once a quarter, they're not in a rush, they'll probably do a couple cuts.

The, the challenge is, of course, then you have the potential new administration for next year in which case, that could put the fed on hold for a little while.

So base cases is they'll be cut, they'll get two cuts under their belt, perhaps a third and then it will depend on the outcome of the election and, and how things are shaping up.

For example, if Trump is in office and he starts talking about tariff policy right away, it would make sense for the fed to pause and kind of see how things shake out.

Do you expect to any further weakening within the labor market?

When you take a look at the jobless claims numbers that were out this morning essentially in line with expectations, the labor market has been so resilient up until this point.

Are we going to see maybe a bit more signs of softness as we do near that first cut?

Yes, we just put out our, our payrolls forecast this morning.

We're looking for 1 65,000 on, on NFP.

Consensus is looking for 180.

So a little bit softer than expected, but 165 by historical standards is very good.

So, no, I don't expect to see material weakness, but we should start to see a softening in demand over the past year.

Job gains have averaged well over 200,000.

I don't, I think those days are probably over and we'll be looking for something that's more in the 100,000 on average over the next couple of months, which is healthy but more rebalanced type of labor market.

So we haven't really seen signs of, of significant weakness in the labor market.

I don't necessarily anticipate that to be the case, but it should start to soften which should help bring rates back down and the fed cuts kind of at play.

So the, the hawkish narrative that's in the market right now should probably reverse over over the next couple of months.

All right, Stephanie Roth.

Always great to talk to you.

Thanks so much for joining us here this morning Wolf Research, a chief economist.

Thanks.