The US Federal Reserve hints at interest-rate cuts in 2024

This week’s diary is packed with central bank meetings. We start with the US Federal Reserve then the Bank of England, followed by the ECB later that day. This time around though things will be different because the headline announcements will be unchanged for interest-rates, but they will be unable to merely wish us all a Happy Christmas and return in the New Year. Of course there was always a problem with such a message after raising interest-rates to the highest for many years. But the real issue returns us to my post on the 6th of this month which is when will the interest-rate cuts arrive?

The Federal Reserve gets rather gung-ho

We have become used to the US Federal Reserve using Nick Timiraos as its mouthpiece and so this on Friday attracted my attention.

The University of Michigan consumer survey showed year-ahead inflation expectations fell to their lowest level since March 2021 After rising from 3.2% in September to 4.5% in November, year-ahead expectations reversed and then some, to 3.1% in the preliminary December survey.

With his role the focusing on lower inflation expectations made me wonder what was coming next? Yesterday we got this.

Fed officials aren’t likely to have a serious conversation about cuts this week but the prospect of lower rates is coming into view.

The crucial point here is the implication that lower interest-rates are not only on their way but that the Fed wants to put that in the public domain. I would imagine that such news is designed to move us on from thinking that the Fed claims of “Higher for Longer” seem to omit the longer bit. If we switch to the piece in the Wall Street Journal we are told this.

The big questions now are about when the Fed can start cutting rates and by how much. The answers will matter greatly to households, markets and possibly the 2024 presidential election.

The latter point is interesting as many have been suggesting interest-rate cuts will come at the end of next year.Personally I would expect the Fed to try to avoid getting involved in the election. Can you imagine would The Donald would make of interest-rate cuts during the campaign?

Whatever the timing we are being guided towards interest-rate cuts being on their way.

Still, they don’t think rates need to remain at their current, economically restrictive setting indefinitely. Officials’ updated rate projections, to be released Wednesday after their meeting, will show that most expect to cut rates somewhat next year.

Although we do get an out break of the “two-handed economist” as to the timing.

“It would be very difficult if they cut rates now only to turn around and hike again later,” said David Wilcox, a former senior Fed economist who is now at the Peterson Institute for International Economics. “At the same time, they need to be on their front foot, ready to ease as evidence accumulates that…inflation is persuasively moving down.”

Financial Times

The position of the Financial Times is more complex as it has long had a role as the house journal for the Bank of England. Although in more recent times it has pursued something of a love affair with the ECB as well. Anyway it has pursued a different line.

Leading central banks are preparing to rebuff investors’ bets about the pace at which interest rates will fall, as they meet for the final time this year amid strong employment numbers.

Okay, how does that work?

The Fed, which gathers ahead of the ECB and BoE this week, faces a particularly challenging task amid increasing investor speculation that the US central bank will reverse course and lower borrowing costs earlier in 2024 than officials had suggested would be necessary to bring inflation down to its 2 per cent target.
Fed chair Jay Powell has sought to temper those expectations, stressing it was “premature” to say interest rates had peaked or to begin sketching out the timing and parameters under which policymakers would consider cuts.

As you have no doubt already noticed Jay Powell has flown a kite in the WSJ about possible interest-rate cuts leaving the FT behind the times. Let us move onto Europe where it should be better informed.

he ECB and BoE both meet on Thursday. Policymakers in the eurozone and the UK are also anxious to push back against the market’s rate-cutting narrative, and can point to relatively resilient labour markets as ballast for their arguments.

As labour markets are lagging indicators it would seem that European central bankers are as so often out of phase with what is happening on the ground. According to the PMI releases of last week things have begun to change in the Euro area.

Firms in most sectors cut employment in November, as
weak demand led to lower new orders……….The labour market finally succumbed to the downward drag from weakening demand conditions as employment fell for the first time since January 2021.

The use of the unemployment level in the Euro area has two other flaws.

Eurozone unemployment remains close to a record low at 6.5 per cent and unit labour costs per hour worked are rising at the fastest pace since Eurostat records began in 1995.

The first is the issue highlighted by the UK of falling response rates to the surveys on the labour market. Next up is the way the Euro area has much higher unemployment rates than its peers. As to labour costs they are in my opinion responding to past inflation rises and the falls in real wages.

Switching to the UK somebody needs to tell the FT that the CPI inflation rate was 4.6% in October.

Indicators of UK wage growth have eased and so has headline inflation, which dropped to 4.7 per cent in October.

As to what they will do the message below will look a little silly if the Federal Reserve has changed tack the evening before.

“To try to prevent financial conditions loosening further and to send a signal ahead of the new year pay round, the [BoE] will likely double down on its ‘high for longer’ message,” said Andrew Goodwin of Oxford Economics.

Although to be fair if you look at the Bank of England’s recent track record one might reasonably expect it to be out of touch.

Comment

We can complete our review by looking at the Confederation of British Industry which seems to be as out of touch as it is possible to be.

The Bank of England will not cut interest rates until 2026, according to projections from the CBI, which predicts sluggish economic growth for the next three years.
In its latest outlook on the UK economy, the CBI said the base rate will stay at 5.25 per cent for at least two more years, despite rising market speculation that rates will be cut next year. ( The Times)

By then we could easily be in the next cycle of rises. But in my opinion whatever the rhetoric from central bankers we will see ever more debate about interest-rate cuts as we move into 2024. The problem for those plugging the central banking line is this.

So far, so good. Inflation has fallen faster this year than many Fed officials anticipated after a hair-raising series of rate increases that none of them envisioned two years ago.

Fair play to the Wall Street Journal for pointing out how wrong central bankers have been. But we have a direction of travel now with the only matter of doubt being the speed. Perceptions of that will change with the data as for example the US labour market data on Friday suggested a slower pace, but not the trend.

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