By Robert Eisenbeis, Ph.D.
The minutes of the FOMC December meeting were released on January 3, 2023, and were greeted by a slight market turndown. Markets had previously priced in the three rate cuts that the December SEPs (Summary of Economic Projections) suggested might be on the table for 2024.
However, review of the minutes fails to reveal that there were significant discussions of rate cuts other than were included in the SEPs.
Indeed, the minutes themselves suggested that while baseline projections implied that a lower target range might be appropriate by the end of 2024, that outlook was highly uncertain; and it was even possible that, depending on incoming data, the policy course for 2024 might include either further tightening or keeping the current target range in place for a longer period of time than was currently anticipated.
Following the pattern of previous minutes, the current release reviewed both staffs’ and participants’ views on progress towards the Committee’s inflation objectives as well as the economic conditions for GDP and employment.
After a 5.2% increase in GDP for Q3 2023, staff saw GDP slowing in Q4 and labor markets continuing to be tight and coming into better balance with unemployment at 3.7%.
While inflation had clearly declined over 2023, it was still above the Committee’s 2% target range. The minutes also stated that progress on inflation was uneven across key components.
Energy, core goods prices, and housing services were likely to decline, but core services had continued to increase.
The minutes stated that financial conditions eased over the fall and, if that continued, then there were upside risks to inflation. Interestingly, there was no mention of a recession.
After release of the minutes, we got new data from the Institute for Supply Management showing that its Purchasing Managers’ Index increased to 47.40, up from 46.70 for October and November.
That piece of information was sufficient for the Atlanta Fed to increase its GDPNow forecast for Q4 GDP from 2% to 2.5%. On the heels of that information, on Friday, January 5, we got the jobs report for December.
As shown below, the economy created 216,000 new jobs, exceeding the number of 170,000 that had been expected.
All these data suggest that GDP will be above trend for Q4 2023 and will further dampen expectations that a recession is on the horizon.
That strength also implies that the FOMC can be comfortable holding rates steady, further dampening the market’s expectation of rate cuts being on the near-term horizon.
As we have written previously (“Will They Cut Rates? When?”), given that there will not be another SEP until June, it would take a large movement in data indicating an emerging weakness in the economy (a sharp decline in Q1 GDP and a sharp increase in unemployment, for instance) to trigger a rate cut before late in the year.
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