Investors are feeling bullish that the Federal Reserve will begin to cut interest rates in the first half of next year, despite Fed Chair Jerome Powell and other officials saying they’re not considering rate cuts just yet. Still, some think rate cuts could come as early as the first quarter.
The latest inflation figures have been encouraging, and real-time forecasts show that economic growth has slowed dramatically since the summer as the year comes to a close — a clear downshift from the red-hot pace of growth in the third quarter.
There is growing confidence that rate cuts only a few months away, with a roughly 44% chance of that first cut coming in March, according to futures.
The Fed has kept rates steady for periods of time before beginning to cut. At one point, the Fed held its benchmark lending rate steady for more than a year starting in the summer of 2006.
But if the predictions of a March cut bear out, or even a rate cut in May, so much for the Fed’s higher-for-longer strategy.
“Now we’re moving into higher-for-long-enough,” Diane Swonk, chief economist at KPMG, told CNN in an interview.
Whenever the Fed begins to pare back its key interest rate, the pace will likely be gradual in the beginning, and it’s clear there won’t be a return to ultralow interest rates.
The Fed’s two-day policy meeting this week concludes on Wednesday, and the central bank is widely expected to hold rates steady at a 22-year high for the third consecutive meeting. Central bank officials will also release their latest set of economic projections, which will likely reflect inflation cooling faster than previously estimated.
But why would the Fed begin to cut rates so soon, if some officials, including Powell himself, have said it’s still way too early?
Investors point to the Fed’s own mantra of being data dependent. Markets are calling the Fed’s bluff when it comes to any additional hikes.
The last time Powell said more hikes remains on the table — during a discussion in Atlanta earlier this month — stocks rallied as markets took Powell’s hawkishness in stride.
“Powell is incentivized to maintain that hawkish bias until the last second, and they will do more if they need to, but it comes down to the data and the data suggests that they don’t need to do any more,” Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, told CNN.
The Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 3% in October from a year earlier, down from September’s 3.4% rise. The core measure excluding food and energy prices rose 3.5% in the 12 months ended in October. All eyes will be on the November Consumer Price Index to be released this week.
Whether or not the Fed ultimately does what the market expects is another story.
Powell has said market expectations are simply forecasts, but the Fed likes to be predictable and officials frequently give hints through speaking engagements on what to expect from the central bank — a concept known as “forward guidance.”
“The voice that I think really matters right now is Christopher Waller’s, a notoriously hawkish governor, and he’s been very much at the leading edge of messaging shifts at the Fed over the last couple of years,” Melson said.
Fed Governor Christopher Waller at an event in Washington late last month cheered the slowdown in economic activity this fall, which could help corral inflation back to the central bank’s target of 2%.
“I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2%,” Waller said. “I am encouraged by what we have learned in the past few weeks — something appears to be giving, and it’s the pace of the economy.”
China has vowed to strengthen fiscal policy in 2024 to boost its flagging economy, my colleague Laura He reports.
The announcement Friday followed a meeting of top Communist party officials and came just days after Moody’s downgraded its outlook on China’s credit rating to negative from stable.
The ratings agency on Tuesday cited risks related to “structurally and persistently lower medium-term economic growth,” and ongoing troubles in China’s property sector.
Officials at Friday’s meeting, which was chaired by leader Xi Jinping and attended by the powerful 24-member Politburo, pledged to do more to expand domestic demand and stabilize foreign trade and investment, according to a readout released by the official Xinhua news agency.
“Next year, [we must] continue to implement proactive fiscal policy and prudent monetary policy,” it said. “The proactive fiscal policy must be moderately strengthened, with improved quality and efficiency.”
Fiscal policy is the use of taxation and government spending to influence the economy. Monetary policy typically refers to decisions taken by central banks to influence the cost of borrowing and control inflation.
The officials also reiterated the importance of preventing risks in key areas and “holding to the bottom line that no systemic risk will occur.”
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Monday: Earnings from Oracle.
Tuesday: The US Labor Department releases its Consumer Price Index for November. The US Treasury Department releases its monthly budget statement for November.
Wednesday: Earnings from Adobe. The UK’s Office for National Statistics releases October data on gross domestic product. The US Labor Department releases its Producer Price Index for November. The Federal Reserve announces its latest monetary policy decision.
Thursday: The Bank of England and European Central Bank announce their latest interest-rate decisions. The US Commerce Department releases November figures on retail sales. The US Labor Department reports the number of new applications for jobless benefits in the week ended December 9, in addition to export and import prices in November. China’s National Bureau of Statistics releases November data on retail sales, industrial production, fixed-asset investment, and the unemployment rate.
Friday: Earnings from Darden Restaurants. The Federal Reserve releases November figures on industrial production. S&P Global releases December business surveys gauging economic activity in the US.
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