Fed Monitor: On Hold in December and Through 2024

The Fed has already indicated it would not hike at the policy meeting on 13 December. I believe this is partly due to disinflation happening faster than envisaged under September SEP: Q4/Q4 core PCE is likely to be around 3.25% against 3.7% in the SEP (Table 1).

The forward guidance is more likely to follow the latest speeches of Chair Powell than Governor Waller.

In his 1 December speech, Powell warned that ‘It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so.’

Powell believes disinflation with low unemployment reflects positive supply shocks, namely the unwinding of pandemic-related imbalances including a recovery in labor supply (Charts 10 and 11). He sees a risk that these positive supply shocks will not be enough on their own to return inflation to the 2% target.

By contrast, three days earlier, Waller, the leading FOMC hawk, had stated ‘I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%’. He further added in the Q&A that ‘several more months of disinflation could lead to rate cuts’. Waller was largely responding to recent data releases that printed below expectations (Charts 12).

Other FOMC members communications have been less market moving (Table 2). There is a consensus on continuing with QT, and public discussions of financial conditions have practically ended.

I have changed my view and now expect the Fed on hold through 2024, based on energy prices remaining around current levels. I will give more details in my upcoming Fed Preview.

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Current Fed Macroeconomic Forecast

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Markets Over-Pricing Fed Cuts

Positive Supply Shocks Create Goldilocks Economy

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)