 |
|||||||||
A Box Score Look At The Economy |
|||||||||
|
FORECASTS & TRENDS E-LETTER A Box Score Look At The Economy IN THIS ISSUE: The Fed Cuts Rates I have been a baseball fan since I was a kid in California. During the baseball season I would snag my grandfather’s copy of the Oakland Tribune to read the box scores from the night before. And as the season waned toward the playoffs, it was doubly important to check the standings. I needed to see if my team was in first place or how hard they had to fight to get there. Baseball fans have probably guessed that my team is the “Swingin’ A’s” – or better known as the Oakland Athletics. I waited a little longer this week to send out our usual Tuesday E-Letter until now so I could report whether the Federal Reserve cut interest rates. We know now that they have. So let’s take a “box score” look today at where the economy stands and what Jerome Powell and the Fed think 2025 holds in store. The Fed Cuts Rates The Federal Open Market Committee (FOMC), which determines the monetary policy of the Federal Reserve, lowered interest rates on Wednesday by 25 basis points (0.25%) to a range of 4.25%-4.5% at its final meeting of the year. This was widely expected by most Fed watchers. Perhaps the big surprise though was in the Fed’s Summary of Economic Projection (SEP), including its “dot plot,” which shows policymakers’ expectations of where interest rates could be headed in 2025. As seen in the graph below, most Fed officials see two more rate cuts next year. Just a few months ago, the FOMC projected four rate cuts next year.
Sticky Inflation So far this year, inflation has moderated somewhat but remains stubbornly above the Federal Reserve's 2% target on an annual basis as measured by the core Personal Consumption Expenditures index, which excludes volatile food and energy prices.
The SEP indicated that the Federal Reserve sees core inflation peaking at 2.5% next year — higher than September's projection of 2.2% — before cooling to 2.2% in 2026 and 2.0% in 2027. That higher inflation outlook and fewer projected interest rate cuts pushed markets over a cliff, with the S&P 500 index ending down -2.95% and Nasdaq Composite sliding over -3.5%. Strong Economy, Steady Jobs The Fed increased its previous forecast for US economic growth, with the economy expected to grow at an annualized pace of 2.1% next year before cooling to 2.0% in 2026 and 1.9% in 2027. In September, officials saw GDP growth at 2.0% in 2025, 2026, and 2027. It also revised its previous forecast of 2.0% growth in 2024 to 2.5%.
The job market has also been a key focus for the Fed after the unemployment rate ticked up to 4.2% in November. Economists have categorized the current labor market as "low-hire, low-fire" as FOMC members debate whether the jobs picture is gradually cooling or quickly weakening. Officials see the unemployment rate ticking up slightly to 4.3% in 2025, lower than the previous forecast of 4.4%. Unemployment is expected to remain at that level through 2026 and 2027. Trump Inflationary Factor A range of economists have offered predictions that new tariffs — as well as immigration moves — could be inflationary and pose new challenges for the central bank. Tariffs are of course a central question about what Trump 2.0 may entail for the economy, with the president-elect pledging a potential wave of new trade wars on China and other trading partners both during the campaign and in the weeks since his victory. Powell repeatedly underlined Wednesday that there are more questions than answers at this point on what policies Trump will actually put into place as he acknowledged the uncertainty surrounding what effects such policies may have on the Fed’s rate path. "We expect significant policy changes," Powell said. "We need to see what they are and what effects they have. We will have a much clearer picture" once that happens. The Fed, he added, is "thinking about these questions" but won’t have definitive answers for some time yet. A Final Thought Altogether, the economy is in decent shape with a “soft landing” truly in the cards. In his press conference Wednesday, Powell said a rate hike in 2025 “doesn’t appear to be a likely outcome.” That’s good news in the fight against inflation. GDP growth will be moderate. Job market weakness – unlikely. Powell believes Fed policy is in a “really good place. I expect another good year next year.” “I think it’s pretty clear we have avoided a recession," he said, and "the path down has been better than many predicted." So maybe the statistics show Team USA has won the economic pennant. If that’s the case, it will be a nice Christmas present to start the coming year. Merry Christmas and Happy New Year! [Henry]
|
|||||||||
|
|||||||||
|
ProFutures, Inc © 2023 Contact Us |
|||||||||
Print
Email
