The FOMC began its December 12–13 meeting with some good news on both the labor front and on inflation. On top of that, the participants went into the meeting knowing that the economy entered the fourth quarter having grown 5.2% in the third quarter.
As for the labor market data, job creation is down somewhat from the previous year; but the market has been steady and moderate. New job creation was 150,000 in October, followed by 199,000 in November, after averaging 192,000 in the previous four months.
Additionally, the October JOLTS (Job Openings and Labor Turnover Survey) data show that job openings continue to exceed the number of unemployed persons and that more people are quitting their jobs than are being laid off.
On the issue of inflation, the Fed’s preferred inflation number, PCE, declined from 3.4% in September to 3.0% in October, and the core measure went from 3.7% in September to 3.5% in October. And on Tuesday, the CPI went from 3.2% in October to 3.1 in November, while core CPI held steady at 4%.
Energy and food prices have recently moved in opposite directions, with the decline in energy prices largely offsetting increases in food prices.
With that background, the FOMC decided Wednesday to keep its funds rate constant at 5.25%–5.50%, citing slower growth, moderating job growth, low unemployment, and slowing inflation. It also decided to continue reducing its portfolio holdings of Treasury securities and agency debt. But what drove a more than 500-point increase in the Dow after the meeting was the SEP (Summary of Economic Projections) projections released along with the decision. The SEP showed cuts in the target rate for 2024 consistent with three rate cuts, with the median funds rate seen at 4.6% by year end as compared with 5.1% in September. The dot chart for the federal funds rate shows the distribution of participants’ expectations for where the funds rate will be, with six participants seeing three cuts and five seeing at least two cuts in 2023. Only two participants saw no change; one saw only one rate cut, while one saw a cut at almost every meeting.
GDP growth was projected in the SEP to be down from 2.6% in 2023 to 1.4% in 2024, and inflation was projected to end 2024 at 2.4%. Given that Chairman Powell implied in his press conference that the Committee was still concerned about inflation and given the fact that there would be no update of the SEP in its January meeting, it is most likely that any rate cuts would not come until later in 2024. But this potential path did not dampen the market’s reaction, not only to the rate cuts but to the increased likelihood that there was no significant probability of a recession in the near term.
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Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.
