Overview: Over the past week, the Federal Reserve essentially stuck to the anticipated script, and the major inflation data declined in line with expectations. This lack of negative surprises from these potentially large hurdles pleased investors, and mortgage rates ended the week lower.
As expected, the Fed made no change in the federal funds rate on Wednesday. Many investors were hoping for additional information about the timing of rate cuts later in the year, but officials provided no precise guidance. According to the statement released after the meeting, it will not be appropriate to lower rates until they have “greater confidence” that inflation is moving “sustainably” toward their target of 2% annually. During his press conference, Chair Jerome Powell again emphasized that future decisions will be based on incoming economic data and avoided being pinned down on specific timing. However, he did elaborate that additional inflation reports consistent with recent trends would provide the needed confidence level to loosen monetary policy. While some investors anticipate that the first rate cut will take place at the next meeting in March, most now think it will happen at the following one in May.
Fed officials monitor inflation very closely, and the Personal Consumption Expenditures (PCE) Price Index is their favored indicator. In December, core PCE, which excludes food and energy to reduce short-term volatility, was up 2.9% from a year ago. This was down from an annual rate of 3.2% last month and the lowest level since March 2021. While still moving in the right direction, it remains above the Fed's target.
Gross domestic product (GDP) is the broadest measure of economic activity. During the fourth quarter, U.S. GDP rose at an annualized rate of 3.3%, above the consensus forecast but down from 4.9% during the third quarter of 2023. Strength was seen in consumer and government spending, business investment, and inventory growth. Despite higher interest rates, the economy has shown few signs that it will enter a recession, and early estimates are for solid growth to continue during the first quarter of 2024.
Core PCE (annual % change)
Institute for Supply Management (ISM) Manufacturing Index
Construction Spending report