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#64 - The Final 2023 FOMC Meeting and the Balancing Act of Rate Expectations

The final FOMC meeting of 2023 is this week's key event. There's a unanimous expectation for the third consecutive meeting to maintain the Fed funds rate.

Why is it important?

Firstly, following a series of lower inflation figures, Fed Governor Waller initiated discussions about rate cuts in his dovish speech, mentioning potential cuts if inflation remains low for several months. The market interpreted this as a pivot and anticipated an aggressive rate cut cycle beginning as early as March. As of December 8, a 110 basis point reduction is forecasted for 2024.

This shift towards a rate pivot is bolstered by a surprising sharp decrease in inflation, with the core PCE index dropping to 3.5% year-over-year, the lowest since May 2021. The September Summary of Economic Projections (SEP) predicted 3.7% for 2023 and 2.6% for 2024. Considering the recent lower-than-expected figures, these forecasts are likely to be revised downwards, possibly closer to 2% for 2024.

Does this set the stage for Fed rate cuts?

Not necessarily. There are compelling reasons for the Fed to delay a pivot.

Last week's labor market data, stronger than anticipated, indicates ongoing resilience, despite weaker JOLTS and ISM employment figures. Consumer sentiment significantly exceeded expectations, reaching 69.4, as concerns over inflation eased. The manufacturing and service PMIs have been relatively stable in recent months. Although the Manufacturing PMI slightly declined to 49.40 from 50 in November, it's still considerably higher than in July 2023.

Crucially, financial conditions have eased considerably, now at their most lenient since February 2022. Is this the right time to signal a rate pivot? It seems unlikely. The current economic landscape doesn't warrant it, and Fed Chair Powell probably doesn't want to be remembered as another Arthur Burns.

Bottom Line:

While there's intense speculation about rate cuts in 2024, this week's FOMC meeting will be closely watched for any signs of confirmation. We might see some dovish updates, like downward revisions in core PCE projections for 2023 and 2024, along with minor adjustments in GDP and a slight increase in the unemployment rate forecast.

However, a confirmation of the current rate cut expectations seems highly unlikely. Therefore, the potential for disappointment remains substantial.

Good Luck.

Team MacrometR


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