Today's Fed announcement and Chairman Jerome Powell’s press conference marked the Fed’s first acknowledgement that inflation is more contained. After having been on hold for four of the last five meetings, the Federal Reserve has now inserted the word "any" into its statement, indicating that additional policy firming may not be necessary to get to the Fed's 2% inflation target by 2025.
The news on inflation has been good. The Fed’s members see the core Personal Consumption Expenditure Index at 3.2% in 2024, down from 3.7% at the last meeting. They also see unemployment at 4.1% and believe that US GDP growth will be at 1.4%. These numbers point to a very soft landing with no recession on the horizon.
With the Fed and market participants adopting the idea that inflation is not going to be part of the permanent landscape, there is a strong likelihood that the Fed will be cutting rates in 2024, and analysts now see more than a 40% likelihood that the Fed's first cut will come before the end of Q1 2024.
As US markets celebrate what looks to be an inflation victory, it is not clear that we are going back to the exceptionally low rate paradigm that we saw from 2008 through 2021 anytime soon, if ever. Sovereign debt, especially in the US, is now at unsustainable levels. Oil prices have been exceptionally low, and are completely out of whack with inflation-adjusted long-term norms. De-globalization of our supply chains and immigration curbs could result in pricing pressures on core commodities and labor costs. And, the climate crisis may soon cause such dislocation in the economy that prices end up on a long-term trajectory upwards.
For now, depositors should think about locking in still high CD rates and lower 30-year mortgage rates.
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