According to Powell, “I think you can say that there’s little basis for thinking that the economy is a recession now. I think there’s always a probability that there will be a recession in the next year, and it’s a meaningful probability no matter what the economy is doing. So it’s always a real possibility.” Notably, Fed governor Chris Waller said that if inflation continues to fall, then the Fed in the next several months could cut interest rates.
- GDP is on track to expand +2.5% during 2023, bolstered by strong consumer demand as well as improving supply conditions. After picking up somewhat over the summer, activity in the housing sector has flattened out and remains well below the levels of a year ago, largely reflecting higher mortgage rates. Higher interest rates also appear to be weighing on business fixed investment.
- The labor force participation rate has moved up since last year, particularly for individuals aged 25 to 54 years, and immigration has returned to pre-pandemic levels.
Key Summary Points from Powell’s 12.13.23 Presentation
- Since early last year, the FOMC has significantly tightened the stance of monetary policy. We have raised our policy interest rate by 5-1/4% and have continued to reduce our securities holdings at a brisk pace ($1.2 trillion so far).
- Today, we decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. While participants do not view it as likely to be appropriate to raise interest rates further, neither do they want to take the possibility off the table.
- Inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain. We anticipate that the process of getting inflation all the way to 2% will take some time. The Fed’s median PCE inflation projection is 2.8% this year, falls to 2.4% next year, and reaches 2% in 2026.
- The reason you wouldn’t wait to get to 2% inflation to cut rates is that policy would be too late. You’d want to reduce restriction on the economy well before 2% so you don’t overshoot.
- If the economy evolves as projected, the median participant projects that the appropriate level of the federal funds rate will be 4.6% at the end of 2024, 3.6% at the end of 2025, and 2.9% at the end of 2026, still above the median longer-term rate.
- We’re not talking about altering the pace of QT right now, we’re allowing runoff each month. The reverse repo facility has been coming down quickly, and reserves have been either moving up or holding steady. At a certain point, the reverse repo facility will level out and reserves will start to come down.