Trends & Tides – US FOMC December 2023

The US FOMC maintained the Federal Funds Rate within the target range of 5.25-5.50% during the December 2023 meeting and indicated three 25 bps rate cuts in 2024.

US economic growth continues to remain strong, as indicated by the upward revision in the 2023 growth projection. The FOMC has revised the real GDP median projection for 2023 upwards to 2.6% from 2.1% in the previous meeting. The GDP projection for 2024 was marginally lowered to 1.4%. The moderation in the US growth surprise index suggests that further upward revisions to growth are unlikely. The US labor market is also exhibiting signs of easing, marked by weaker job gains and diminished earnings growth. According to FOMC median projections, the unemployment rate is anticipated to peak at 4.1%.

The FOMC has downwardly revised inflation projections. Participants expect inflation to dip below 2.5% in 2024 and then gradually converge with the 2% target by 2026. Recent inflation prints have continued to trend downwards as energy costs dropped. Also, inflation expectations have decreased due to the recent fall in oil prices. There tends to be a strong correlation between oil prices and inflation expectations. Recent US inflation prints have also been lower than market expectations, contributing to lower inflation expectations.

The FOMC Dot Plot suggests three 25 bps rate cuts by end-2024 and an additional four 25 bps rate cuts by end-2025. In the post-policy conference, Powell also sounded dovish, stating he doesn’t foresee the need for more tightening and emphasizing that a recession isn’t necessary for rate cuts.

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