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Meeting expectations… With the Federal Open Market Committee (FOMC) scheduled to meet this week, market watchers have one question on their mind: when will the Fed start cutting its federal funds rate target?
Almost no one expects the FOMC will cut its federal funds rate target this week. The CME Group currently puts the odds at just 1.0 percent. But any indication that the Fed will start cutting sooner (or later) than currently anticipated could move markets. Likewise, markets could move if FOMC members project rates will fall further than (or not quite as far as) currently expected.
The FOMC has not given clear guidance on when it will start cutting its target rate. Earlier this month, Fed Chair Jerome Powell told Congress the FOMC “does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.” But he didn’t say what would inspire such confidence.
The CME Group currently puts the odds that the federal funds rate target range will be lower in May at 6.1 percent. There is a 53.0 percent chance that the target range will be 25 basis points lower in June, and a 3.3 percent chance that it will be 50 basis points lower. There is only a 24.7 percent chance that the target rate range remains at 5.25 to 5.5 percent following the July meeting.
How far will the federal funds rate target range fall this year? In December, the median FOMC member projected the federal funds rate target would fall to 4.625 percent, which is consistent with a target range of 4.5 to 4.75 percent range. Five members thought the range would be 25 basis points higher. Four members thought the range would be 25 basis points lower. Hence, fifteen of the nineteen (78.9 percent) members thought the federal funds rate target range would fall between 4.25 and 5.0 percent this year.
Markets largely agree with FOMC member projections. According to the CME Group, the federal funds futures market is currently pricing in an 82.9 percent chance that the federal funds rate target is between 4.25 and 5.0 percent following the December meeting.
Prices… The Consumer Price Index (CPI) grew at a continuously compounding annual rate of 5.3 percent in February 2024, according to the latest data from the Bureau of Labor Statistics. The CPI has grown at an annualized rate of 3.9 percent over the last three months, compared with 3.2 percent over the last six months.
The recent uptick is largely driven by the CPI’s index for shelter, which grew at an annualized rate of 5.1 percent in February. The index for shelter accounts for roughly one-third of the CPI basket and tends to lag broader price changes.
Survey says… Consumers have revised up their expectations for longterm inflation, according to the latest survey from the New York Fed. While they still expect around 3.0 percent inflation over the next year, they now expect 2.7 percent inflation per year over the next three years (compared with 2.4 percent in January) and 2.9 percent inflation per year over the next five years (compared with 2.5 percent in January).
Respondents were also somewhat less optimistic about the labor market. The mean probability of losing a job over the next 12 months increased from 11.8 percent in January to 14.5 percent in February, while the mean probability of voluntarily leaving a job increased from 17.7 percent to 19.5 percent. When asked whether they would expect to find a job in the next three months if they were to lose their job today, respondents put the odds at 52.5 percent, down from 54.2 percent in January.
Production… Industrial production increased 0.1 percent in February 2024, new data from the Fed show. Industrial production is 0.9 percentage points higher than it was in January 2020, just prior to the pandemic. It is 0.2 percentage points lower than its year-earlier level.
Capacity utilization was unchanged month-over-month at 78.3 percent. It is 1.3 percentage points below its long-run average.
More broadly, production is on pace to grow at a moderate rate in the early months of 2024. The Atlanta Fed’s GDPNow model currently estimates real Gross Domestic Product will grow at an annualized rate of 2.3 percent in Q1-2024. Real GDP grew 2.5 percent in 2023.