By Robert Eisenbeis, Ph.D.
Markets have reacted strongly to the most recent FOMC decision (to hold the federal funds rate at 5.25-5.5%) and that the Summary of Economic Projections (SEPs) included the likelihood of three rate cuts in 2024. In fact, it could be argued that markets have already priced in those three rate hikes. In response, several FOMC participants have begun to speak out, attempting to dampen the certainty of those cuts. FOMC Vice Chairman John Williams stated on December 15, after the Fed’s December FOMC meeting, that he felt it premature to be even thinking about rate cuts at this point. Similarly, FRB Cleveland President Loretta Mester, who will be a voting member in 2024, noted on December 18 that she felt that markets had gotten “a little bit ahead” of the FOMC and that the next phase for policy was to focus on how long rates had to remain restrictive to bring inflation down, before being concerned about cutting rates. Just a day later, FRB Atlanta President Raphael Bostic, who will also vote next year, noted that he felt there was no urgency to cut rates, in part because he believed that inflation would come down slowly over the year. That same day, FRB Richmond President Barkin, a 2024 voting member, essentially echoed President Bostic when he said while the FOMC had made good progress in bringing rates down but that he needed to see more evidence of consistency in the data on inflation before rate cuts could begin. The only voting Fed president who viewed rate cuts as likely to be needed in 2024 was FRB San Francisco President Mary Daly. She stated on December 18 that she felt three rate cuts would be appropriate next year. With four of the five voting Federal Reserve Bank presidents already expressing some skepticism about cutting rates in the near term, what is likely to happen with Fed policy in 2024? First, there will not be a new set of SEPs until March 19-20. This timing means we will likely get no clue as to how views may or may not have changed at the FOMC’s first meeting on January 30-31. The Committee will have received the first estimate of Q4 2023 GDP right before the January meeting, but preliminary estimates are that it will be reasonably firm. The Atlanta Fed’s GDPNow estimate is for 2.7% growth on the heels of the last release for Q3 of 4.9%. In January, the FOMC will have data on the CPI for December, but by its March meeting it will also have two months of inflation data, and it will have data on PCE for November, December and January. November’s PCE showed the first decline since 2020 even as employment grew 199,000 that month. Barring some shocking development, however, it would take a large movement in other data, such as a sharp increase in the unemployment rate, for rate cuts to begin in March. Looking even farther into the future, since the next SEPs will not occur until June 2024, it isn’t likely that rate cuts would begin before that meeting, where the cuts could be justified by evidence of a sharp decline in GDP in Q1 of 2024 or by forecasts of a significant decline in employment and substantial progress on the inflation front. So, those speculating on immediate rate cuts are, to quote President Mester, “a bit ahead” of the FOMC.
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