As 2023 wraps up, let’s dive into some of the details that influenced the Fed’s final meeting of the year and discuss what the committee members will likely be paying attention to as we enter 2024.
Consumer price data continues to play an outsized role in guiding Fed policy. Published the morning of the FOMC’s first meeting day, November’s numbers showed headline inflation inching down to 3.1 percent on a year-over-year basis. While the progress is welcome, it was buoyed by falling energy prices, which can’t be relied on as a consistent disinflationary force. Core prices (excluding volatile food and energy) increased by a bit more than expected in the month, but the year-over-year reading remained unchanged at 4 percent. These results left room for the Fed to maintain its restrictive messaging without raising concern about the broader disinflationary trend remaining intact.
In addition to easing inflation, we’ve seen the labor market continue to come into better balance. Although the unemployment rate ticked down to 3.7 percent in November, the number of job openings continues to decline, while additions to nonfarm payrolls continue to hold at levels lower than what we saw earlier in the year.
Altogether, the Fed’s decision to keep rates unchanged is supported by the continuation of promising trends, as well as the expectation that previous rate hikes will continue to work their way through the economy and provide additional tightening as the full effects have yet to be felt.
Heading into 2024, one of the big questions surrounding monetary policy focuses on the timing and magnitude of potential rate cuts. The futures markets are pricing in a rate cut as early as March, but Powell did his best to keep the language around that topic quite vague. “The question of when will it become appropriate to begin dialing back the amount of policy restraint in place—that begins to come into view and is clearly a topic of discussion out in the world and also a discussion for us at our meeting today,“ he offered. “There’s a general expectation that this will be a topic for us looking ahead.”
This month’s meeting came with the FOMC’s Summary of Economic Projections (SEP), which includes a dot plot of the members’ expectations for where rates should be over the coming years. According to the members’ median estimate, rates will land between 4.5 percent and 4.75 percent by the end of 2024, implying three-quarters of a percent in cuts within the year. These projections are nonbinding and are constantly subject to change. Keeping the door open for things to adjust on the fly, Powell indicated that “while we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress towards our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate.”
Economic growth will be heavily considered within the rate cut discussion, and the next GDP report is slated to come out just ahead of the January FOMC meeting. The committee will also have another round of inflation data to review by that point, as well as plenty of employment data. If economic growth and inflation slow, and the labor market comes further into balance, Chair Powell may start getting more comfortable discussing the prospect of future rate cuts. While his comments would likely be more abstract for months to come and may not speculate on specific timing, even a perceived shift in his willingness to comment on the topic will be pivotal in the overall conversation of Fed monetary policy.
Ultimately, the FOMC maintains its stance of meeting-to-meeting data dependency, so we’ll be closely monitoring its evolving thoughts as more data is released. We plan to continue these post-meeting blogs, so be sure to subscribe to The Independent Market Observer so you don’t miss out. The next FOMC meeting is scheduled for January 30–31, and we’ll be here to help you digest all the news from the Fed in the new year.