While the Fed pivoted at the December Federal Open Market Committee meeting with its median projection for an additional two 25 basis points (bps) rate cuts in 2024 and 2025, which would bring the Fed funds rate to 4.6% and 3.6% respectively, it maintained a semblance of vigilance against inflation by maintaining its 2026 and long-run rate projections. We continue to expect that the Fed may lift its long-run estimate closer to 3.0%, perhaps at a future Jackson Hole symposium.
If central banks’ urgency to return inflation to their respective targets encapsulated an underlying theme of the global economy in 2023, early 2024 starts with assessing the ramifications of their initial success. It is a fitting time to take stock: after years of collectively fighting a bout of inflation now seen as transitory with the benefit of hindsight, policy paths, economic trajectories, and fiscal roles amongst the world’s largest economies appear set to splinter.
Although the Federal Reserve and the US economy may be leading this divergence, the Fed’s shift was enabled by its clinical progress against inflation, culminating with the December Personal Consumption Expenditures (PCE) report. The Fed’s favoured inflation measure showed the first monthly decline in prices since April 2020, and our preferred view of inflation on a three-month annualised basis decelerated to 2.9%, which is within the prevailing, pre-pandemic range. For those keeping tabs on when core inflation may reach the Fed’s 2% target, if the monthly core PCE readings continue to average 0.2%, the target may be reached before mid-year 2024. And this is before the full effect of slowing rents emerges in the data.
