Today, December 18, the Federal Reserve lowered its benchmark interest rate for a third consecutive time.The Open Market Committee voted 11-1 to cut the federal funds rate to a range of 4.25%-4.5%. Cleveland Fed President Beth Hammack voted against the action, preferring to hold rates steady.
When the Federal Reserve announces its latest interest rate move and it’s Dot Plot projections on future interest rates, inflation, and GDP growth, it will be the Dot Plot projections that matter to the financial markets.
Inflation remains stubborn. The Consumer Price Index (CPI) rose at a 2.7% annual rate in November, according to Labor Department data released Wednesday. That was hotter than a 2.6% rise in October. But that matched economists forecasts. It was also above September’s 2.4% annual rate. On a monthly basis, inflation increased 0.3% from October to November, the biggest gain since April. Prices for housing, energy, and particularly food all rose.
CPI core inflation, prices excluding volatile food and energy categories, rose another 0.3% for the fourth straight month. The are rate was up 3.3% for the year. For the past six months, core inflation has been stuck at an elevated level above the Fed’s target of 2%.
All eyes will be on the Consumer Price Index inflation report for November due out on the morning of Wednesday, December 11. It’s the last big inflation data dump before the Federal Reserve meets on December 18.
The U.S. economy added 227,000 jobs last month, the Labor Department reported Friday morning, December 6. In addition, revisions added 56,000 jobs to the totals for October and September. Which adds up to a strong recovery from the shocking low 12,000 new jobs initially reported for October. Initial analysis that the almost non-existant growth for October was due to hurricanes and strikes now looks correct. At the same time, the unemployment rate, which is calculated in a survey separate from that which produces the jobs total, ticked up to 4.2% from 4.1%. The jobs total and the unemployment rate were broadly expected by economists. The complete picture is of an economy showing a continued modest expansion. In my opinion, that’s enough to lead to a 25 basis point cut at its December 18 meeting in the Federal Reserve’s benchmark short-term interest rate from the current range of 4.50% to 4.75%. The CME FedWatch took today put the odds od a 25 basis point cut at the December meeting at 85.1%. That’s up from 66% odds a week ago
At 8:30 a.m. on Friday, December 6, investors will see the U.S. jobs report for November. Economists expect that the economy added 200,000 jobs in the month and that for the unemployment rate will hold steady at 4.2%.
Yesterday, Wednesday, November 27, the report from the Bureau of Economic Analysis showed that the Personal Consumption Expenditures index, the Federal Reserve’s preferred inflation measure, had continued the stall that began in May.
Today’s video is Fed One and Done in December? On November 13, the CPI inflation numbers showed inflation ticking up slightly, but the market still believes the Fed will cut rates again in December. On November 13, the CME Fedwatch tool had it at 83% odds we’ll get a cut and I think it’s almost certain. However, when the Dot Plot forecast of GDP, inflation, and interest rates is released in December, I think we’ll see much more uncertainty for the future and likely a planned pause. The three major factors poised to affect the economy are a substantial tax cut, high tariffs and the possibility of mass deportations promised by the president-elect. While two of those items may cancel each other out–with tax cuts being massively stimulative and tariffs cutting into growth by 1.5-2 percentage points while raising costs for consumers, the question of deportations remains. Mass deportations could result in a huge labor shortage and disruptions to supply chains, leading to higher prices. The economy will be under a lot of inflationary pressure from these potential policies and it’s likely the Fed will announce a pause until they see how this all shakes out.
Inflation ticked up slightly on an annual basis in October, the latest evidence that further reductions in inflation are getting hard to achieve. The Consumer Price Index climbed 2.6% from a year earlier, up from September’s 2.4% annual rate, the Bureau of Labor Statistics reported today. Core inflation, which strips out more volatile food and energy prices, held steady at 3.3% annual rate.
Look out for more volatility in the bond market. BlackRock, JPMorgan Chase. and TCW Group have all warned that the bumpy ride is likely far from over. But also expect that the big overall trend for 2024 of rising bond prices and falling yields on hopes for aggressive interest rate cuts from the Federal Reserve is done.
The Federal Reserve lowered interest rates on Thursday by a quarter of a percentage point. The cut was the second this year, following on a larger than usual 50 basis point cut in September. The size of this cut was expected by the financial markets. Wall Street is expecting another 25 basis point cut at the central bank’s December 18 meeting. With the cut and its size so widely expected investors and traders were left trying to find policy hints in the Fed’s words. The pickings were rather slim.
When I posted the previous version of this Special Report back on September 30, I wrote: “I don’t know which candidate will win the election. Right now the polls are within the margin of error on the national level–and even tighter in the seven battleground states that will likely decide the election. But I do know the results on November 5 will move stocks. Some right off the bat even before the results are certified. And more significantly as a new administration clarifies its policy views and takes office.” That has changed just a bit with last night’s victory by Donald Trump. We do know who won and will be the President come January 20. And we do know whose policies will move stocks and the financial markets in general. So let’s see if I can bring my picks and strategic advice up to date.
