Research Report: December 13, 2023
The Federal Reserve declared victory today, projecting a soft landing as its base case in the years ahead, with more cuts in short-term rates, and with inflation gradually getting back to its 2.0% goal without a recession. Unfortunately, we think the Fed is declaring mission accomplished too early.
The Fed didn’t change short-term interest rates today, nor did it alter the pace of Quantitative Tightening, but it made major changes to its projections for short-term interest rates. Not one policymaker on the Federal Open Market Committee thinks the short-term interest rate target will be higher a year from now than it is today, which is 5.375%. And while the median forecast from policymakers in September was one rate cut of 25 basis points in 2024, now the median projection is 75 bps. In turn, the median policymaker projects another 100 bps in rate cuts in 2025 and then another 75 bps in 2026.
True, inflation is trending down. The Consumer Price Index is up 3.1% from a year ago versus a 7.1% in the year ending in November 2022. But much of the improvement is due to energy, which is down 5.4% in the past twelve months. The Core CPI is still up a worrisome 4.0% from a year ago compared to 6.0% in November 2022. In other words, the Fed is likely to have more trouble getting broad measures of inflation, like the CPI, back down to its goal than it has bringing it down in the past year or so.
Moreover, the Fed should be focused on not cutting rates too aggressively and prematurely, which could re-ignite the inflation problem like the Fed did on multiple occasions under Chairman Arthur Burns in the 1970s. The economy is still growing for now, but we think it falls into recession in 2024 and that real GDP growth significantly lags the 1.4% predicted by the FOMC. Given that the Fed has now signaled 75 bps in rate cuts even in an environment of moderate growth, if we are right about economic growth it will be very difficult for the Fed to resist generating higher inflation in 2025 and beyond.
All My Best – jtk
(For transparency, I did not write this. Brian Wesbury and his team authored it. He is an economist that I hold in high regard.)
Not a client and have questions? No worries, there’s no obligation. Click HERE to schedule a pressure-free meeting. You’ll likely hear things that you’ve never heard before. It will definitely be worth your time.
Clients can always call me or click HERE for a convenient time to talk or meet.
* Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
* This newsletter and commentary expressed should not be construed as investment advice.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
* Past performance does not guarantee future results. Investing involves risk, including loss of principal.
* The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee it is accurate or complete.
* There is no guarantee a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
* Asset allocation does not ensure a profit or protect against a loss.
* Consult your financial professional before making any investment decision.
December 13, 2023 – Research Reports by Brian S. Wesbury and his team.