Andrew Pyle
March 20, 2024
Is the Fed okay with inflation above 2%?
A couple of weeks ago, I wrote a commentary where we discussed the latest Bank of Canada meeting and whether it could entertain rate cuts this year, even if headline inflation was above 2%. More importantly, could it do so if core inflation remained close to 3%.
This afternoon, the Federal Reserve FOMC meeting concluded with no change in rates and virtually no edits to the last meeting’s statement. The decision was fully expected by market participants (remember that three months ago, the consensus on the street was that the Fed would actually begin cutting rates today) and there was also no shift in where Fed officials project rates will be over the course of this year. The median prediction from the so-called “dot plot” is for the Fed’s target rate to be 4.6% by the end of the year. This implies that we will get three reductions – exactly the forecast from the last meeting.
Where there was a little bit of confusion today was in the economic projections underlying the decision and language. For 2024, the Fed now expects underlying or core PCE inflation to be 2.6%, versus its previous call for 2.4%. It also expects real GDP growth to come in at 2.1% - a significant upward revision to its prior prediction of 1.4%. The unemployment rate is now forecast at 4% versus 4.1%.
What is the confusion in this? Well, if you think the economy is stronger and that inflation might be higher, why would you be predicting the same number of rate cuts that you had at the last meeting? There are two possible reasons for this. First, maybe Fed officials didn’t think there was enough of a revision in their economic projections to warrant a reduction in the amount of expected easing in rates. Second, and perhaps more worrisome, is the Fed implicitly saying that it is comfortable with inflation above 2%? In other words, do officials believe that rates should come down even if the 2% target isn’t achieved, or at least not in the foreseeable future? At his press conference, Chair J. Powell pushed back against the latter and insisted that the upward revisions to inflation were simply the result of how recent data for January and February have impacted the average, not the expected direction.
Our view is that rates do begin to come down by the June or July meetings, assuming the inflation data reported between now and then show continued progress, even if it is a slow pace. Anything that suggests a new upward trend in inflation is developing will take the cards off the table, so to speak.
I will be talking about this at our monthly conference call, this evening at 7pm ET and details are listed below.
On behalf of the Pyle Wealth Advisory team, have a great rest of the week.
Andrew Pyle
Pyle Wealth Advisory Conference Call Details
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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. The views of Andrew Pyle] do not necessarily reflect those of CIBC World Markets Inc.
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