Monthly Economic Insights- December 2023
Fed keeps rates unchanged, opens the door to rate cut in 2024
The consumer-price index rose 3.1% in November from a year earlier, only a slight slowdown from October (3.2%) but still enough for the Fed to leave interest rates unchanged for the fourth month in a row.
As further proof of the Fed’s changing tone in policy, the meeting summary notes also lowered interest rate expectations from 5.6% to 5.4% in 2023; 5.1% to 4.6% in 2024; and 3.9% to 3.6% in 2025.
Federal Reserve Chairman Jerome Powell surprised markets last week by mentioning it's now time to begin considering when to cut rates, kicking off rallies across the board. Powell acknowledged the dangers of overtightening which could continue to improve pricing stability, yet also hurt the labor market if the cost of capital remained too high.
That view was further supported by San Francisco Fed President Mary Daly who is among a group of other Fed officials estimating three rate cuts in 2024. Daly, however, indicated those cuts might still be too restrictive and run the risk of driving up unemployment.
Core inflation, which strips out volatile food and energy components, rose 0.3% from the prior month, which is faster than the Fed’s long-term target of 2%, but well within the generally accepted safe zone among Fed watchers.
On the employment front, the latest Job Openings and Labor Turnover Summary (JOLTS) from the The Bureau of Labor Statistics showed the number of job openings decreased once again this past month to 8.7 million, while the number of unemployed rose to 6.5 million. That ratio of JOLTS-to-unemployed (1.34) has steadily decreased over the past 20 months, giving some credence to the Fed’s concern over a possible softening of the job market.
Bottom Line: After several years of pandemic-related upheaval, the economy seems to be stabilizing more predictably. Inflation is slowing, interest rates remain elevated but steady, and the labor market is cooling as well. Yet, the lingering question remains: what kind of economic landing lies ahead?
Recession talk seems to be off the table especially since GDP growth for 2023 is expected to finish at 2.6% vs. 2.1% prior. However, it is expected to weaken a bit in 2024 to 1.4% vs. 1.5% prior. Nonetheless, economic expansion is predicted for some time which should quell any near term recessionary concerns.
Claiming a decisive win against inflation might be premature, but it appears that the current inflationary pressures have been mitigated for now. We believe this factor, combined with reduced borrowing expenses, and the increased prices of stocks, bonds, and other assets likely bodes well for growth in 2024.
— Marcus Scott, CFA, CFP®, Chief Investment Officer (CIO) for Country Club Trust Company
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