RSS Feed by Calculated Risk on 12/10/2023 08:21:00 AM
Sunday, December 10, 2023
FOMC Preview: No Change to Policy Expected
Most analysts expect there will be no change to FOMC policy at this meeting, keeping the target range for the federal funds rate at 5‑1/4 to 5-1/2 percent.
Currently the market expects the next Fed move to be a 25 bp cut announced at either the March or May FOMC meeting. The market is pricing in the 2nd cut in either June or July - and a total of 4 or even 5 cuts in 2024. Fed Chair Powell will probably push back on those expectations at the press conference this week.
1 Projections of change in real GDP and inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated.
The unemployment rate was at 3.7% in November. The FOMC's unemployment rate projection for Q4 was probably close.
2 Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated.
As of October 2023, PCE inflation increased 3.0 percent year-over-year (YoY), down from 3.4 percent YoY in September, and down from the recent peak of 7.1 percent in June 2022. So, the FOMC projection for Q4 2023 was too high.
PCE core inflation increased 3.5 percent YoY, down from 3.7 percent in September, and down from the recent peak of 5.6 percent in February 2022. This remains a concern for the FOMC, however this includes shelter that was up 6.9% YoY in October (even though asking rents are slightly negative YoY). Also, core PCE inflation was fairly high in November and December 2022 - increasing at a 4.1% annual rate - and it seems likely YoY core PCE inflation will be below the low end of the FOMC Q4 projection.
Projections will be released at this meeting. For review, here are the September projections. Since the last projections were released, the economy has performed better than the FOMC expected, and inflation was below expectations.
The BEA reported real GDP increased at a 5.2% annual rate in Q3. GDP tracking estimates show Q4 at around 1.2% SAAR. This would put Q4 over Q4 GDP at 2.6%. So, the FOMC projection for year-over-year growth in Q4 2023 was too low.
| GDP projections of Federal Reserve Governors and Reserve Bank presidents, Change in Real GDP1 | ||||
|---|---|---|---|---|
| Projection Date | 2023 | 2024 | 2025 | |
| Sept 2023 | 1.9 to 2.2 | 1.2 to 1.8 | 1.6 to 2.0 | |
| June 2023 | 0.7 to 1.2 | 0.9 to 1.5 | 1.6 to 2.0 | |
The unemployment rate was at 3.7% in November. The FOMC's unemployment rate projection for Q4 was probably close.
| Unemployment projections of Federal Reserve Governors and Reserve Bank presidents, Unemployment Rate2 | ||||
|---|---|---|---|---|
| Projection Date | 2023 | 2024 | 2025 | |
| Sept 2023 | 3.7 to 3.9 | 3.9 to 4.4 | 3.9 to 4.3 | |
| June 2023 | 4.0 to 4.3 | 4.3 to 4.6 | 4.3 to 4.6 | |
As of October 2023, PCE inflation increased 3.0 percent year-over-year (YoY), down from 3.4 percent YoY in September, and down from the recent peak of 7.1 percent in June 2022. So, the FOMC projection for Q4 2023 was too high.
| Inflation projections of Federal Reserve Governors and Reserve Bank presidents, PCE Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2023 | 2024 | 2025 | |
| Sept 2023 | 3.2 to 3.4 | 2.3 to 2.7 | 2.0 to 2.3 | |
| June 2023 | 3.0 to 3.5 | 2.3 to 2.8 | 2.0 to 2.4 | |
PCE core inflation increased 3.5 percent YoY, down from 3.7 percent in September, and down from the recent peak of 5.6 percent in February 2022. This remains a concern for the FOMC, however this includes shelter that was up 6.9% YoY in October (even though asking rents are slightly negative YoY). Also, core PCE inflation was fairly high in November and December 2022 - increasing at a 4.1% annual rate - and it seems likely YoY core PCE inflation will be below the low end of the FOMC Q4 projection.
| Core Inflation projections of Federal Reserve Governors and Reserve Bank presidents, Core Inflation1 | ||||
|---|---|---|---|---|
| Projection Date | 2023 | 2024 | 2025 | |
| Sept 2023 | 3.6 to 3.9 | 2.5 to 2.8 | 2.0 to 2.4 | |
| June 2023 | 3.7 to 4.2 | 2.5 to 3.1 | 2.0 to 2.4 | |
