Rate Hike Cycle Updates
The Fed left rates at 5.25%-5.50% and has reiterated their plans to cut rates during 2024. Right now, they are anticipating up to three rate cuts for a total of around 75bps. 75bps in rate cuts would put the base borrowing rate at 4.5%-4.75%; however, according to Reuters, Fed Chair Bostic is thinking the rates could be around 4.75%-5% to end the year.
Either of these ranges are in line with where they anticipated rates to fall by the end of 2024 as published on Sept 20th 2023. We know that the Fed can change their policy at anytime as a result of developments.
It is unclear why a number of investors are now expecting up to six rate cuts totaling around 2.25% in 2024. This would not be in line with the fed forecast as of Sept 2023 or with what Fed Chairman Powell has said at this time. This could happen if the Fed decided this number of rate cuts were necessary or if the Fed found this number of rate cuts possible as we continue to see disinflation. Either way, we are expecting to see some rate cuts this year.
Here is some other economic news which is also on the Fed’s radar such as Unemployment, along with inflation and GDP.
GDP -
The Q3 2023 GDP was revised last week to 4.99% which was under expectations of 5%, but above 2.62%, the average GDP since Q1 2020. 4.99% is also the highest GDP since Q4 2021 and is above the 54 year average of 2.81%. The holiday season began strong over November and we will have to wait and see what the GDP was to end the year.
Will this translate into more stagnant PCE inflation?
Not in November 2023, but we will see about December 2023 when PCE is announced on January 26th, 2024.
Personal Consumption Expenditures (PCE) excluding energy and food slowed to 3.2% year over year in November. This is lower than before but is still above the Fed's 2% goal.
What about other inflation gauges like CPI and PPI?
Year over year November 2023 CPI was 3.1%. Inflation without energy or food stayed at 4% for November. A number of ‘core’ categories remain around 5-8%. For example, there is continued disinflation in the category for ‘Rent of a Primary Residence’. 6.9% in Nov 2023 which is down from 7.8% in August 2023 and 8.6% in January 2023.
PPI has been much lower over 2023 and was 0.9% in November 2023.
The holiday season started off strong with high spending over black friday. We will see if this continues through Christmas and New Years when CPI is reported tomorrow.
Along the same lines, with a higher dollar, exports are more expensive for other countries. The higher dollar can help keep import prices down which can translate into lower inflation or disinflation. Tough to say if Fed rate cuts will this reverse the current disinflation trend. We expect to see more year over year inflation percentage drop offs in 2024.
Treasury Yield Curve Updates
Many investors have been anticipating rate cuts of over 2% during 2024, which has led to a lot of bond buying that drove up bond prices over Q4 2024. The bond price increases drove down the yields.
The Treasury yields were close to reaching 5% on the long end of the curve and by the end of December, these rates were below 4% again. The inversion of the curve is still above the historical average which still signals a recession.
Ideally, the rate cuts over the next couple of years should even out the curve and eventually create a healthy one where long term rates are higher than short term ones.
Labor Market
We have not seen a major increase in the unemployment rate, which is good. Inflation has been coming down without a substantial amount of additional unemployment, as calculated and reported. There has been some indication that hirings have slowed and we have seen some layoffs.
The latest report was out today. The national unemployment rate remains unchanged at 3.7% which remains below historical averages.
Sources of Data:
1) The Bureau of Economic Analysis, U.S. Department of Commerce: Gross Domestic Product, https://www.bea.gov/data/gdp/gross-domestic-product (Accessed Jan 10th 2024)
2) The Bureau of Economic Analysis: Personal Income and Outlays, https://www.bea.gov/news/2023/personal-income-and-outlays-november-2023 (Accessed Jan 10th 2024)
3) U.S Bureau of Labor Statistics: Consumer Price Index, November 2023, News release Table 1, https://www.bls.gov/cpi/tables/supplemental-files/home.htm (Accessed Dec 14th 2023)
4) U.S. Bureau of Labor Statistics: Producer Price Indexes, Historical Records of PPI Data, https://www.bls.gov/ppi/detailed-report/home.htm, (Accessed Jan 4th 2024)
5) U.S. Bureau of Labor Statistics: Economic News Release, Employment Situation Summary, https://www.bls.gov/news.release/empsit.nr0.htm (Accessed Jan 5th 2024)
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