Home Markets Two major developments this week could determine the future of the Fed’s rate policy

Two major developments this week could determine the future of the Fed’s rate policy

by SuperiorInvest

Traders work at the New York Stock Exchange (NYSE) in New York City, U.S., on January 19, 2024.

Brendan Mcdermid | Reuters

Markets have become less convinced that the Federal Reserve is ready to push the button on interest rate cuts, an issue that directly affects where the economy and stocks are headed.

Two big economic reports due this week could go a long way toward determining at least which way central bank policymakers might lean and how markets might react to a shift in monetary policy.

Investors will get their first look at the overall picture of fourth-quarter economic growth for 2023 when the Commerce Department releases its initial estimate of gross domestic product on Thursday. Economists surveyed by Dow Jones expect the total of all goods and services produced in the U.S. economy to have grown at a rate of 1.7% during the last three months of 2023, which would be the slowest since the decline of 0 .6% in the second quarter of 2022.

A day later, the Commerce Department will release the December reading on the personal consumption expenditures price index, one of the Federal Reserve’s favorite inflation gauges. The consensus expectation for core PCE prices, which exclude volatile food and energy components, is for 0.2% growth for the month and 3% for the full year.

Both data should attract a lot of attention, particularly the inflation numbers, which have been trending toward the Federal Reserve’s 2% target, but are not there yet.

“That’s what everyone should be looking at to determine what the path of Fed rates ends up being,” Chicago Fed President Austan Goolsbee said during an interview Friday on CNBC. “It’s not about secret meetings or decisions. It’s fundamentally about the data and what will allow us to be less restrictive if we have clear evidence that we are on the path to” inflation reaching its target again.

Reduced rate cut outlook

The posts come amid market reaction to where the Federal Reserve is headed.

As of Friday afternoon, trading in the federal funds futures market amounted to virtually no chance that the rate-setting Federal Open Market Committee will cut rates at its Jan. 30-31 meeting, according to data from the CME Group indicated through its FedWatch tool. That’s nothing new, but the odds of a cut at the March meeting fell to 47.2%, a sharp drop from 81% just a week ago.

On top of that, traders have taken an expected cut off the table, reducing the easing prospects to five quarter-percentage-point declines from six previously.

The change in sentiment came after data showed stronger-than-expected 0.6% growth in consumer spending in December and initial jobless claims fell to their lowest weekly level since September 2022. On top of that, several of Goolsbee’s colleagues, including Governor Christopher Waller, New York Fed President John Williams and Atlanta Fed President Raphael Bostic, issued comments indicating that at a minimum , are in no rush to make cuts, even if the increases are likely to go ahead.

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“I don’t like tying my hands and we still have weeks of data,” Goolsbee said. “Let’s take a long-term view. If we continue to make surprising progress faster than expected on inflation, then we will have to take that into account when determining the level of restraint.”

Goolsbee noted that a particular area of ​​focus for him will be housing inflation.

The December consumer price index report indicated that housing inflation, which accounts for about a third of the CPI’s weight, rose 6.2% from a year earlier, well above a pace consistent with a 2% inflation.

However, other measures tell a different story.

A new reading from the Department of Labor known as the New Tenant Rental Index indicates a lower path for housing inflation. The index, which measures the prices of new leases signed by tenants, showed a drop of 4.6% in the fourth quarter of 2023 compared to the previous year and more than double that quarterly.

Looking at the data and other factors

“In the very near term, we believe inflation data will cooperate with the Federal Reserve’s dovish plans,” Citigroup economist Andrew Hollenhorst said in a note to clients.

However, Citi expects inflation to be persistent and will likely delay the first cut until at least June.

While it’s unclear how much difference timing makes, or how important it is if the Fed only cuts four or five times compared to the most ambitious market expectations, market outcomes appear to be tied to policy expectations. monetary.

There are many factors changing the outlook in both directions: A continued rally in the stock market could worry the Federal Reserve about higher inflation in the works, as could an acceleration of geopolitical tensions and stronger-than-expected economic growth. .

“By keeping alive the potential for higher inflation, these economic and geopolitical developments could put upward pressure on both short-term rates and long-term yields,” Komal Sri-Kumar, president of Sri-Kumar, said on Saturday. Kumar Global Strategies, in his weekly market note.

“Could the Fed be forced to raise the Fed Funds rate as a next step instead of cutting it?” he added she. “An intriguing idea. Don’t be surprised if there are more discussions along these lines in the coming months.”

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