As anticipated in the U.S., prices rose in August 2024, while the annual inflation rate fell to its lowest point since February 2021, according to a Labor Department report on Wednesday 11th September 2024.
This development likely now paves the way for a Federal Reserve interest rate reduction next week but maybe by only 0.25% and not the 0.50% some pundits have predicted.
The consumer price index, which measures a wide array of goods and services costs throughout the U.S. economy, rose by 0.2% for the month, matching the consensus, as reported by the Bureau of Labor Statistics.
This increase brought the year-on-year inflation rate to 2.5%, a decrease of 0.4 percentage points from July 2024 and slightly below the 2.6% prediction.
Nevertheless, the core CPI, which omits the more fluctuating food and energy prices, saw a 0.3% rise for the month, just above the 0.2% projection. The annual core inflation rate stood at 3.2%, consistent with expectations.
Is the U.S. economy already weaker than the headline data suggests and should the U.S. Federal Reserve already be easing?
In the U.S. recent data (Friday 30th August 2024) showed the personal consumption expenditures (PCE) price index, the Federal Reserve’s favored measure of inflation, ticked up 0.2% last month, as expected. The data seems to back a smaller rate cut.
The question of whether the economy is weaker than headline data suggests and if the U.S. Federal Reserve should already be easing is complex.
The gross domestic product (GDP) increased at an annual rate of 3% in Q2 of 2024, which is a positive indicator. However, the U.S. current-account deficit widened, and personal income and outlays show mixed signals with a slight increase in personal income but a higher increase in personal outlays.
Inflation remains above the Federal Reserve’s 2% target but well below the pandemic-era peak. These factors suggest that while there are positive aspects to the U.S. economy, there are also challenges that may warrant caution from the Federal Reserve.
Is the market too focused on forecasting the size of any possible upcoming cut? “The question no one has asked yet is why is the policy rate is still at 5.5% when inflation is down to almost 2.5%? It would most likely be an error to do a ‘bigger’ rate cut in this kind of environment with all the uncertainty that the U.S. economy is facing.
Jobs data trends are also an important factor and play a major role in decision making. Company performance and future performance predictions are critical to help judge policy direction.
Decisions on monetary policy easing would be based on a comprehensive analysis of all economic indicators and trends.
If the FED go BIG on a rate cut some say it could be very dangerous and spook the markets.
The Dow Jones Industrial Average (DJIA) reached a new record high on Monday 26th August 2024, closing at 41240.
Investors have responded positively to the Federal Reserve’s recent indications that interest rate cuts are highly probable to commence in September 2024.
Market dynamics and sentiment
The rise of the DJIA was propelled by advances in sectors like materials, utilities, and energy. Conversely, the broader market exhibited mixed outcomes. The S&P 500 declined by 0.3%, and the Nasdaq Composite dropped by 0.8%, contrasting with the Dow’s notable performance. This disparity is largely due to the lagging of technology stocks, especially with significant drops in firms such as Nvidia and Tesla.
Federal Reserve
Federal Reserve Chair Jerome Powell’s recent address at the Jackson Hole Economic Symposium was pivotal in bolstering investor confidence. Powell’s remarks indicated that the Fed is ready to cut interest rates, which many investors believe will foster economic growth and stabilise the markets. The expectation of rate cuts has played a significant role in the recent market rally, with predictions of potential reductions up to 1% by the end of 2024.
Dow Jones one day chart at record high
Dow Jones 1 day chart
Despite varied performances across sectors, the Dow reaching a new high signals a wider optimism in the market. As the year unfolds, the dynamics among Federal Reserve policies, corporate earnings, and economic indicators will continue to influence market directions.
The Fed summary stated: “The vast majority” of participants at the July 30-31 meeting “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”
Markets have fully factored in a rate cut for September, marking the first such move since the initial emergency reductions during the early stages of the Covid crisis.
U.S. consumer prices (CPI) increased at the slowest rate in over three years last month, further supporting the argument for the Fed to begin reducing interest rates.
According to the U.S. Labor Department, prices climbed 2.9% in the 12 months leading up to July 2024, marking the smallest yearly rise since March 2021 and a decrease from 3% in June 2024.
The monthly inflation report was under intense scrutiny following indications of weaker-than-anticipated job growth in July, which earlier this month led to upheaval in the stock market and concerns about a recession.
Analysts have suggested that these figures should persuade the Federal Reserve that the elevated borrowing costs are effectively bringing inflation back to its target levels, despite the recent increases in housing and food prices.
Has the Fed over-cooked it this time by waiting too long to reduce interest rates?
U.S. stock markets threw a wobbly after the latest employment data and after the Fed delayed its first rate cut… again. September 2024 now looks likely for that first cut – but by how much: 0.25% or as high as 0.50%?
The latest batch of bad news for the U.S. economy has actually became bad news for stocks this time. For too long the ‘bad news’ has been taken as ‘good news’, especially regarding the likelihood of a Fed interest rate cut – and for the markets in general.
The Federal Reserve (Fed) is grappling with several challenges, including inflation, interest rates, and the broader U.S. and global economies.
Inflation
The Fed has been trying to control high inflation rates, which have been a significant concern. To combat inflation, the Fed has raised interest rates multiple times. Higher interest rates can help reduce inflation by slowing down borrowing and spending, but they can also slow economic growth.
Interest rates
By increasing interest rates, the Fed aims to make borrowing more expensive, which can help cool down an overheated economy. However, this can also lead to higher costs for consumers and businesses, potentially leading to reduced investment and spending.
Economic growth
The Fed’s policies are a balancing act. While they aim to control inflation, they also need to ensure that the economy doesn’t slow down too much. This balancing act can be challenging, especially when external factors like global economic conditions and geopolitical events come into play.
In essence, the Fed’s efforts to manage these issues can sometimes feel like ‘fighting its own shadow,’ as the consequences of their actions can create new challenges.
The timing of interest rate adjustments by the Federal Reserve is a topic of much debate among economists and policymakers.
Inflation control
The Fed’s primary goal in raising interest rates has been to control inflation. If inflation remains high, the Fed might be cautious about reducing rates too quickly to avoid a resurgence of inflation.
Economic indicators
The Fed closely monitors various economic indicators, such as employment rates, consumer spending, and GDP growth. If these indicators suggest that the economy is still strong, the Fed might delay reducing rates to ensure that inflation is fully under control.
Market reactions
Rapid changes in interest rates can cause volatility in financial markets. The Fed often aims for a gradual approach to avoid sudden shocks to the economy.
Global factors
The Fed also considers global economic conditions. For example, if other major economies are experiencing slow growth or financial instability, the Fed might be more cautious in adjusting rates.
Ultimately, the decision to reduce interest rates involves balancing the need to support economic growth with the risk of reigniting inflation. It’s a complex decision with significant implications for the U.S. and global economies.
Looks like the Fed overcooked it this time – but by how much?
Federal Reserve Chair Jerome Powell ended a press conference in which he gave markets exactly what they wanted; a strong indication of a September 2024 rate cut.
Powell says September 2024 rate cut ‘on the table’ if inflation continues to cool.
Federal Reserve officials held short-term interest rates steady but observed that inflation is getting closer to its 2% target.
The FOMC did not signal an immediate rate cut; they reiterated that further progress is necessary before considering rate reductions. However, Federal Reserve Chair Powell’s subsequent statement was markedly dovish, hinting at a potential rate cut in September 2024.
Markets were generally happy with the news after moving up all day in anticipation of the confirmation of a September cut. The Dow Jones, Nasdaq, Russell 2000 and S&P 500 all climbed before and after the news.
Gold prices climbed to $2,482 per ounce, hitting an all-time high.
Gold prices continued to peak at new record highs Tuesday and Wednesday 15th and 16th July 2024.
On Monday 15th July 2024, Powell reportedly said the Fed won’t wait for inflation to reach the central bank’s 2% target before it begins cutting, due to the ‘lag’ in policy effects. He reportedly said the Fed is looking for ‘greater confidence’ that inflation will return to the 2% level. The monthly inflation rate dipped in June 2024 – the first time in over four years.
The price increase has been aided by encouraging comments from the Federal Reserve that it will now more likely cut interest rates in September 2024 following comments from Fed Chair Jerome Powell.
And that has given market investors and traders more confidence. According to the CME FedWatch tool, traders are convinced the FOMC will cut rates by September 2024.
As interest rates fall, gold usually becomes more appealing compared to fixed-income assets such as bonds and general savings accounts.
Jerome Powell appears to be further paving the way for a rate cut at the next meeting in July 2024.
Federal Reserve Chair Jerome Powell reportedly said Monday 15th July 2024 that the central bank will not wait until inflation hits 2% to cut interest rates.
Powell referenced the idea that central bank policy works with ‘long and variable lags’ to explain why the Fed wouldn’t wait for its target to be hit.
‘The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,’ Powell reportedly said.
Instead, the Fed is looking for ‘greater confidence’ that inflation will return to the 2% level, Powell remarked.
‘What increases that confidence in that is more good inflation data, and lately here we have been getting some of that,’ he reportedly said.
Powell also said he thinks a ‘hard landing’ for the U.S. economy was not ‘a likely scenario.’
It looks like it is time for that rate cut, he didn’t say that!
Jerome Powell on Tuesday 9th July 2024 reportedly expressed concern that holding interest rates too high for too long could jeopardize economic growth. This comment came ahead of the consumer price index reading due this week.
Preparing for a two-day session on Capitol Hill, the central bank chief stated that the economy and labour market continue to be robust, even with some recent slowdown. Powell noted a slight reduction in inflation, affirming that policymakers are determined to reduce it to their target of 2%.
“At the same time, in light of the progress made both in lowering inflation and in cooling the labour market over the past two years, elevated inflation is not the only risk we face,” he reportedly said. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Sounds to me like he is paving the way for the first interest rate reduction.
The comment ties-in with the upcoming one-year period since the Federal Open Market Committee (FOMC) last increased the benchmark interest rates.
The ‘Sahm Rule’ serves as a heuristic indicator employed by the Federal Reserve to ascertain the onset of a recession in the economy.
The Sahm Rule is a real-time evaluation tool based on monthly unemployment data from the Bureau of Labor Statistics (BLS). Named after economist Claudia Sahm, it forecasts the onset of a recession when the three-month moving average of the national unemployment rate (U3) increases by 0.50% or more compared to its lowest point in the preceding 12 months.
This simple yet effective indicator helps policymakers monitor economic cycles and respond accordingly
Time to cut according to the ‘Sahm Rule’
Sahm has reportedly stated that the Fed is taking a significant risk by not implementing gradual rate cuts now. Last week, Federal Reserve officials significantly reduced their forecasts for rate cuts this year, shifting from three anticipated reductions noted in the March 2024 meeting to just one.
According to the creator of a well-established rule for predicting recessions, the Federal Reserve is risking an economic contraction by not lowering interest rates immediately.
The U.S. economy exceeded job growth expectations in May 2024, alleviating concerns of a labour market downturn but potentially diminishing the Federal Reserve’s motivation to cut interest rates.
Non-farm payrolls surged by 272,000 for the month – a significant increase from April’s 165,000 and surpassing the consensus forecast of 190,000.
Concurrently, the unemployment rate increased to 4%, marking the first instance it has reached this level since January 2022.
Bad economic news appears to have had an interesting impact on the stock market recently.
Traditionally, negative economic data might be anticipated to result in falling stock prices; however, recent trends have diverged from this norm.
News trend
In the past two months, negative economic news has had a paradoxically positive effect on equities. Investors have responded well to poor economic indicators, partly due to the belief that these could lead the Federal Reserve to begin reducing interest rates.
Dollar and the stock market
In recent times, the S&P 500, a large-cap equity index, and the U.S. dollar have exhibited a nearly perfect correlation. As the dollar has seen a gradual decline, the stock market has conversely experienced a rise. Typically, investors flock to the security of cash, and consequently the dollar, in times of uncertainty, yet they also channel investments into stocks upon the arrival of favourable news.
Economic data
Despite the upbeat trend in the stock market, real economic data has frequently fallen short of Wall Street’s predictions. The Citi Economic Surprise Index, a gauge that compares data to expectations, has been on a downward trajectory. This suggests that expectations have been surpassing the actual economic conditions, signalling that the economic situation may not be as favorable as previously thought.
Dilemma for the Fed
The Federal Reserve methodically reviews economic indicators to influence their interest rate decisions. Typically, unfavorable economic reports might prompt the Fed to reduce rates, unless there’s an uptick in inflation. Escalating inflation generally nudges the Fed towards a tighter monetary policy.
Monthly data roll-out
Data concerning the U.S. labour market presented to the Fed and markets may create that ‘pivotal’ moment – it often does – markets move of Fed comments and ‘awaited’ news. Reports detailing job openings, private sector job creation, and the Bureau of Labour Statistics’ nonfarm payrolls will shed light on the economy’s condition.
If job growth remains within the ‘Goldilocks range’ (neither too strong nor too weak), it may preserve the fragile equilibrium where unfavourable economic news has paradoxically favoured stock prices, while preventing excessive gloom.
Conclusion
To summarize, although adverse economic news has lately been advantageous for stock markets, monitoring this precarious balance is crucial. Excessive pessimism could be a harbinger of impending difficulties, despite its current benefits.
Note about Citigroup Economic Surprise Index
The Citigroup Economic Surprise Index is the sum of the difference between the actual value of various economic data and their consensus forecast. If the index is greater than zero, it means that the overall economic performance is generally better than expected, and the S&P 500 has a high probability of strengthening, and vice versa.
The decision comes as inflation, which measures price rises over a period of time, remains above the Bank’s 2% target at 3.2%. But bank says cuts are coming.
Is the 2% target still a sensible benchmark?
The 2% inflation target set by central banks has been a widely adopted benchmark for monetary policy.
History
The 2% inflation target became prominent in the 1990s and early 2000s. Central banks, such as the Federal Reserve and the Bank of England, have aimed to maintain inflation at this level.
The Federal Reserve has typically pursued an inflation rate of about 2% since 1996.
In January 2012, then-Fed Chairman Ben Bernanke formally established the 2% target, and subsequent Fed chairs have continued to endorse this rate as the preferred level of inflation.
Why the 2% target?
Price stability
The 2% inflation target was selected as it provides a balance between preventing problematic inflation and avoiding damaging deflation. Does it work?
Avoiding deflation
Deflation, characterized by falling prices, can hinder economic growth. Central banks target a 2% inflation rate to avert deflation and ensure stability.
Creditor-Debtor compromise
The 2% inflation target represents a balance between creditors’ preference for lower inflation and debtors’ inclination towards higher inflation.
Challenges
Changing economic environment
In recent years, the global economy has encountered distinct challenges, including sluggish growth, technological upheavals, and demographic changes. Consequently, there is a debate on whether the 2% inflation target requires reassessment.
Persistently low inflation
Despite the efforts of central banks, inflation has persisted below the 2% mark in numerous advanced economies, sparking debates over the potential need to modify the target.
Trade-offs
Aiming for a 2% inflation rate can occasionally clash with other policy objectives, like employment or financial stability. It’s crucial for central banks to judiciously manage these competing priorities.
Revision
Several central banks are revising their strategies. For example, the European Central Bank (ECB) has adopted a more adaptable inflation target, permitting temporary exceedances to balance out extended periods of below-target inflation.
The Bank of England also considers broader economic factors when setting policy, rather than rigidly adhering to the 2% target.
IIn summary, although the 2% inflation target has been a helpful benchmark, central banks are progressively willing to adjust their strategies in response to evolving economic conditions. The current debate focuses on striking an optimal balance between stability, growth, and adaptability.
Central banks saw this period of inflation as ‘transitory’ – it wasn’t. It could be argued that their lack of action led to a bigger inflation problem overall.
The Fed have deliberated over ‘transitory’ inflation – (they got that wrong). They have teased us about when rates will be cut (still waiting). And now we are told no rate cut but: ‘the next rate move is unlikely to be up!’
Probably better to say and do nothing at all? Are you a bit confused? I am.
The U.S. central bank has decided to maintain interest rates, reasoning a ‘lack of further progress’ in reducing inflation. This leaves the Federal Reserve’s key rate at its highest in over two decades, between 5.25% and 5.5%.
Sticky problem
By maintaining high borrowing costs, the Federal Reserve seeks to decelerate the economy and reduce inflationary pressures. However, this also increases the financial burden on businesses due to elevated borrowing expenses and on consumers through higher mortgage and loan payments.
However, as U.S. inflation remains more stubborn than anticipated (and that is being generous), the Fed is now being closely scrutinized over its forthcoming actions.
Analysts, who had predicted rate reductions early this year, have had to delay their projections, with some even suggesting a potential rate hike.
No rate cuts but ‘hike’ unlikely – that’s helpful then
Following the declaration, the Fed Chair reportedly expressed his belief that a rate hike is ‘unlikely,’ reiterating the need for more assurance of subsiding inflation before considering a reduction.
‘The decision will truly be data-dependent; it’s going to take longer to reach that point of comfort. I don’t know how long it will take’, he reportedly stated.
Inflation has become a persistent challenge for the Fed
The battle against inflation persists, gradually impacting the U.S. economy and presenting substantial challenges for the Federal Reserve.
Despite concerted efforts to control it, inflation remains stubbornly remains, leaving policymakers in a dilemma – to stimulate economic growth or to curb spiraling prices.
Let the data speak
Recent data presents a concerning scenario. Indexes from the Commerce Department, used by the Federal Reserve as indicators of inflation, reveal that prices are rising at a rate significantly exceeding the central bank’s annual target of 2%. Consumer spending persists, encouraged by the excessive amount of money circulating in the financial system.
However, this spending spree isn’t sustainable, and consumers are dipping into their savings to fund purchases. The personal savings rate has plummeted to its lowest level since October 2022. Borrowing is up and debt is far too high!
The Federal Reserve’s primary inflation gauge, the personal consumption expenditures price index, rose to 2.7% in March, encompassing all items. The crucial core index, excluding the more volatile food and energy prices, remained constant at 2.8%. These figures highlight the ongoing inflationary pressures.
Fed’s dilemma
The Federal Reserve is navigating a precarious inflation situation. Should it shift towards rate reductions prematurely, there’s a risk that inflation might surge back in 2024. Conversely, persistent inflation could compel central bankers to not only sustain the present rates but also ponder additional increases. The aspiration for a gentle economic descent is at stake.
Outlook
Forecasters anticipate inflation to dip below 2.5% in 2024, yet challenges persist. The Federal Reserve faces the difficult task of steering the economy towards stability and controlling inflation expectations. With the central bank’s policy meeting on the horizon, speculation abounds regarding their forthcoming strategy.
Will they maintain the current interest rates or implement more assertive measures? Their decision is set to influence the economic outlook for the foreseeable future.
Conclusion
U.S. inflation continues to be a persistent challenge, and the Federal Reserve’s efforts are ongoing. The path forward demands cautious steering, as policymakers must achieve a fine equilibrium to sustain economic stability while simultaneously curbing inflation.
And remember, the Fed said inflation was ‘transitory’.
The U.S. economy is on a rip, with employers adding around 303,000 jobs in March 2024 – the largest increase in almost a year.
As the world’s largest economy continues to surge, questions arise about the Federal Reserve’s next move regarding interest rates.
Stronger-than-expected Job Growth
The unemployment rate fell to 3.8%, indicating strong job growth in several sectors such as health care, construction, and government. While economists had predicted job gains of approximately 200,000, the actual numbers have easily exceeded those expectations.
The labour market’s surprising resilience has caught analysts off guard, leading to speculation about the timing of interest rate cuts.
Fed’s Dilemma
The Federal Reserve has held interest rates in a range of 5.25%-5.5%, the highest level in over two decades. Initially, the Fed raised rates sharply in 2022 to curb inflationary pressures. However, the subsequent cooling of price inflation (down to 3.2% in February) without a significant spike in unemployment has complicated matters. The central bank now faces a delicate balancing act.
Delayed Rate Cuts?
The significant increase of 303,000 in non-farm payrolls for March 2024 reinforces the Federal Reserve’s stance that the robustness of the economy permits a gradual approach to interest rate reductions.
The Fed had been expected to initiate rate cuts this year to mitigate the impact of high borrowing costs. However, the stronger-than-anticipated economic performance suggests that rate cuts may not occur until the second half of this year.
Labour Market Dynamics
U.S. government spending in areas like high-tech manufacturing and infrastructure has bolstered the labor market. Additionally, an influx of more than three million immigrants last year has expanded the workforce, potentially keeping wage pressures in check. In March, average hourly pay rose by 4.1% year-on-year, consistent with expectations and near a three-year low.
America’s Comeback
President Joe Biden hailed the latest job figures as a “milestone in America’s comeback.” However, some market analysts argue that the strong jobs growth could complicate efforts to return inflation to the Fed’s 2% target. Some analysts even speculate that rate cuts may not materialize until 2025.
Global Implications
Higher U.S. interest rates have ripple effects worldwide, enticing investors to shift capital toward America. While the Fed’s in-tray still has some warnings, the delay in rate cuts reflects the economy’s underlying strength.
The U.S. jobs boom presents a conundrum for policymakers. Balancing economic vitality with inflation control remains a delicate task, and the Fed’s decisions will reverberate far beyond its borders.
Federal Reserve Chairman Jerome Powell stated on Wednesday 3rd April 2024 that policymakers will need time to assess the current inflation situation, leaving the schedule for potential interest rate reductions unclear.
Referring to the stronger-than-anticipated price pressures at the year’s onset, Powell reportedly stated that he and his colleagues are not in a hurry to relax monetary policy.
Market expectations are leaning towards the FOMC initiating policy easing this year, although adjustments to the anticipated timing and scale of reductions have been necessary due to persistently high inflation.
Meanwhile, other economic indicators, especially in the U.S. labour market and consumer spending sectors, remain robust, affording the Fed the opportunity to evaluate the prevailing situation prior to taking action.
The Fed in March 2024, indicated for the markets to expect three interest rate cuts by the end of 2024 – but what if this didn’t happen?
The Federal Reserve’s decision to maintain interest rates in 2024 could have significant implications for the U.S. economy.
Fed cred –credibility would be the first to go!
The cost of borrowing would remain unchanged. This could discourage businesses from taking out loans for expansion or investment, potentially slowing economic growth. Consumers may also be less inclined to take on debt for major purchases, such as homes or cars, which could impact sectors reliant on consumer spending.
Value of the U.S. dollar could strengthen relative to other currencies. A higher interest rate typically attracts foreign investors seeking better returns, increasing demand for the dollar. While a strong dollar can benefit consumers by making imports cheaper, it can hurt exporters whose goods become more expensive for foreign buyers.
The decision could signal the Fed’s confidence in the economy’s health. By not lowering rates, the Fed may be indicating that it believes the economy can withstand higher borrowing costs without slipping into recession. This could boost investor confidence and potentially lead to increased market activity.
However, the decision could also exacerbate wealth inequality. Those with investments tend to benefit from higher interest rates, as they can earn more from savings and bonds. Conversely, those living paycheck to paycheck may not see any immediate benefit and could face higher costs if they need to borrow.
In conclusion, should the Federal Reserve decide to maintain interest rates in 2024 this could have a mixed impact on the U.S. economy.
The effects would likely be felt across various sectors, influencing everything from business investment and consumer spending, credit to the strength of the dollar and wealth inequality. As always, the actual outcome would depend on a multitude of factors, including the overall health of the global economy and domestic fiscal policy decisions.
Federal Reserve Chair Jerome Powell said in a U.S. TV interview on Sunday 4th January 2024 that the central bank will proceed carefully with interest rate cuts this year and likely will move at a considerably slower pace than the market expects.
Election year rate cuts?
In the interview and after last week’s Federal Open Market Committee meeting (FOMC), Powell expressed confidence in the economy. However, he promised he wouldn’t be swayed by this year’s presidential election and said the pain he feared from rate hikes never really materialised.
“With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully,” he reportedly said.
“We want to see more evidence that inflation is moving sustainably down to 2%,” Powell added. “Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
Powell indicated that it was unlikely the FOMC will make that first move in March 2024, which markets have been anticipating.
The Federal Open Market Committee (FOMC) held interest rates steady and indicated a willingness stop raising interest rates.
But a cut anytime soon is unlikely until inflation is brought fully under control and nearer to the Fed’s 2% inflation target.
The Federal Reserve sent a signal that it is finished with raising interest rates but made it clear that it is not ready to start cutting, just yet. It also said there are no plans yet to cut rates with inflation still running above the central bank’s target.
Federal Reserve interest targets and increases since 2022 to January 2024
Federal Reserve officials in December concluded that interest rate cuts are likely in 2024, though they appeared to provide little in the way of when that might occur, according to minutes from the meeting released Wednesday 3rd January 2024.
FOMC meeting minutes
The rate-setting Federal Open Market Committee (FOMC) agreed to keep its rate steady in a range between 5.25% and 5.5%. Members indicated they expect 0.75% cut by the end of 2024.
Uncertainty
However, the meeting summary noted a high level of uncertainty over how, or even if, that will happen. Markets have reacted negatively to this news.
The minutes noted an unusually elevated degree of uncertainty about the policy path. Several members said it might be necessary to keep the funds rate at an elevated level if inflation doesn’t cooperate, and others noted the potential for additional increases.
But, despite this cautionary tone from Fed officials, markets expect the central bank to cut rates in 2024.
Dot plot
The dot plot of individual members’ indications released following the meeting showed that members expect cuts over the coming three years. This will bring borrow back to the 2% desired target.
The minutes indicated that clear progress had been made against inflation, with a six-month measure of personal consumption expenditures even indicating that the inflation rate has edged below the Fed’s 2% target.
FOMC Dot plot projections through 2026
However, the document also noted that progress has been uneven across sectors, with energy and core goods moving lower but core services still moving higher.
The Dot plot – what is it?
The dot plot, in relation to the FED or FOMC, is a chart that shows the projections of the Federal Reserve Board members and Federal Reserve Bank presidents for the federal funds rate, which is the interest rate that U.S. banks charge each other for overnight loans.
The dot plot is updated four times a year, after each FOMC meeting, and reflects the individual views of the policymakers on the appropriate level of the federal funds rate for the current year, the next few years, and the longer run.
The graph (dot plot) can help markets and the general public understand the Fed’s monetary policy stance and expectations for the future path of interest rates.
However, the dot plot is not a policy commitment or a forecast, but rather a snapshot of the opinions of the FOMC participants at a given point in time. The dot plot can change over time as new information and economic conditions develop.
The Dow Jones Industrial Average (DJIA) hit a new all-time high, on 13th December 2023. It closed at 36799 surpassing its previous record of 36585points that it had set on 4th January 2022. This was the fourth consecutive record close for the index.
Record high
The Dow’s record high was driven primarily by the Fed holding the interest rate at 5.5% and signalling that it expects to cut interest rates three times in 2024 to stimulate growth and inflation.
Other factors such as strong corporate earnings, optimism about the economic recovery from the COVID-19 pandemic, the emergence of AI and its effect on the economy and for a U.S. ‘soft landing’ all played their part.
Dow a bellwether for the U.S. economy
The Dow is not only a measure of stock market performance, but also a reflection of the overall health and confidence of the U.S. economy. It is often used as a benchmark for investors and analysts to evaluate their portfolios and strategies. The Dow is also closely watched by policymakers and media outlets as a measure of public sentiment and expectations.
Dow hits new all-time high
Dow hits new all-time high
The Dow, in intraday trading, continued to climb to over 37200.
Fed holds U.S. rates at 5.5%, indicates three cuts coming in 2024
The Federal Reserve on Wednesday 13th December 2023 held its key interest rate steady for the third time in a row and set the scene for multiple rate cuts in 2024 and 2025.
With inflation easing and the economy holding up policymakers Federal Open Market Committee policymakers voted unanimously to keep the rate in a range between 5.25%-5.5%.
Possible three Fed rate cuts pencilled in for 2024
Along with the decision to stay on hold, the FOMC pencilled in at least three rate cuts in 2024, assuming quarter percentage point increments. That’s less than market pricing of four, but more aggressive than what officials had previously indicated.
Markets had widely anticipated the status quo decision which could end a cycle that has seen 11 hikes, pushing the interest rate to its highest level in more than 22 years. There was uncertainty, though, about how ambitious the FOMC might be regarding policy easing.
The FOMC’s so called ‘dot plot’ of individual members’ expectations indicate another four cuts in 2025, or a full 1%. Three more reductions in 2026 would take the Fed rate down to between 2%-2.25%, close to the longer-term outlook, though there were considerable difference in the estimates for the final two years.
Dow at new all-time high!
Following the Fed update the Dow Jones Industrial Average jumped more than 400 points, surpassing 37,000 for the first time creating a new Dow all-time high.
Fed Chair Jerome Powell reportedly said he and his colleagues remain steadfast in getting policy in line with their 2% inflation target, but ‘we are not confident that we have achieved such a stance’.
He stressed the Fed nevertheless can be cautious as the risks between doing too much and too little have come into closer balance.
Federal Reserve Chairman Jerome Powell reportedly said Thursday 9th November 2023 that he and his fellow policymakers are encouraged by the slowing pace of inflation but are unsure whether they’ve done enough to keep the momentum going.
Inflation battle
Speaking a little more than a week after the central bank voted to hold rates steady, Powell said in remarks aimed at the International Monetary Fund (IMF) gathering in Washington, D.C., that more work could be ahead in the battle against high prices.
The statement comes with inflation still well above the Fed’s long-standing goal but also considerably below its peak levels in the first half of 2022. After 11 U.S. rate hikes, we have witnessed the most aggressive policy tightening since the early 1980s, the FOMC have increased rates from pretty much zero to a range of 5.25%-5.5%.
Those increases have coincided with the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, to fall to an annual rate of 3.7%, from 5.3% in February 2022. The more widely followed consumer price index peaked above 9% in June of last year.
Progress
Powell referenced the progress the economy has made. Gross domestic product (GDP) accelerated at a ‘quite strong’ 4.9% annualised pace Q3 2023, though Powell also said the expectation is for growth to ‘moderate in coming quarters’. He described the economy as ‘just remarkable’ in 2023 in the face of a broad expectation that a recession was inevitable.
Nothing like a massive ‘self-pat’ on the back for a job well-done? Remember the Fed’s initial analysis? IT was for inflation to be ‘transitory’. They didn’t get that right either.
Futures pricing, according to the CME Group, suggested there’s less than a 10% chance that the FOMC will approve a final rate hike at its Dec. 12-13, 2023, meeting, even though committee members in September pencilled in an additional 0.25% rise before the end of 2023.
Impression drawing of Fed Chair. The Fed is ‘not confident’ according to Jerome Powell.
Traders anticipate the Fed will start cutting rates next year, probably around June 2024.
Central banks, 18 months ago got it fundamentally wrong and they got it wrong on many other occasions too.
So why take any notice?
The Fed and other central banks insisted that inflation would be ‘transitory’ – it wasn’t. It reached 7%. That’s 5% above the target of 2%.
Along with the misdiagnosis on prices, Fed officials, according to projections released in March 2022, collectively saw the key interest rate rising to just 2.8% by the end of 2023. It is now 5.25%.
The Great Depression (1929–1939) was an economic bomb that affected countries across the world. It was a period of severe economic depression after a major fall in stock prices in the United States. It began around September 1929 and led to the Wall Street stock market crash on 24th October 1929 (Black Thursday). See Wikipedia article here.
It was the longest, deepest, and most widespread depression of the 20th century.
The Great Depression of 1929
The Great Inflation
The Fed pursued an overly expansionary monetary policy in the 1960s and 1970s, which fueled high inflation and eroded the value of the dollar. The Fed also underestimated the impact of oil shocks and other supply shocks on inflation and was slow to tighten monetary policy to restore price stability. The Fed eventually raised interest rates sharply in the late 1970s and early 1980s, which triggered a severe recession. And in1991 inflation surged to 8.5%.
The Great Recession
The Fed likely contributed to the build-up of financial imbalances and excessive risk-taking in the 2000s, (Dotcom bubble) – by keeping interest rates too low for too long and by failing to adequately supervise and regulate the financial system.
The Fed likely contributed to the build-up of financial imbalances and excessive risk-taking in the 2000s
The Fed also reacted too slowly to the emerging signs of distress in the housing market and the financial sector and was unprepared for the global financial crisis that erupted in 2008. Remember, ‘sub-prime’ lending. We can see signs of similar stress in the U.S. car loan market now.
The Fed and other central banks including the Bank of England initially underestimated the severity and duration of the pandemic and its impact on the economy. The Fed also overestimated the transitory nature of inflation, which surged to a 30-year high in 2021 due to supply chain disruptions, pent-up demand, fiscal stimulus, and base effects. The Fed maintained an ultra-accommodative monetary policy stance for too long, despite mounting evidence of overheating and inflationary pressures.
The Fed finally raised interest rates by 0.75% in December 2022, but faced criticism for being behind the curve and for communicating poorly with the markets.
Transitory inflation
The Fed said inflation would be transitory in 2021 and 2022. The Fed used this term to describe the higher-than-normal prices that emerged during the Covid-19 economic crisis, which were expected to be temporary and not part of a long-term trend. The Fed attributed the inflation surge to factors such as supply chain bottlenecks, pent-up demand, fiscal stimulus, and base effects.
The Fed also said that it would let inflation run above its 2% target for some time, to achieve an average inflation rate of 2% over time. However, as inflation remained high and persistent in 2021 and 2022, the Fed faced criticism for being behind the curve and for communicating poorly with the markets. The Fed eventually raised interest rates.
And now, much of the same. The Fed is again ‘tinkering’ with policy to manage ‘transitory’ inflation and will most probably engineer a recession as a result.
