The annual rotation of the US Federal Reserve's interest-rate-setting committee means that its members with votes for 2024 are marginally more hawkish than the group in 2023, but this won't change the outlook that interest rates will be reduced the following year.
Many analysts, however, argue quite the opposite: should inflation continue to decline faster than anticipated, Fed policymakers will likely want to lower interest rates even further than the three-quarters-of-a-percentage point that was suggested in recently released projections.
That opinion was further reinforced on Friday with the release of the Fed's preferred inflation indicator, the personal consumption expenditures price index. More than economists had predicted, both core and headline measures cooled, sending the annualized rates over the previous three and six months to levels that were or were under the 2% target of the Fed.
As evidence mounts that price pressures are reducing and the job market is cooling in response to the Fed's rate increases from March 2022 to July 2023, the focal point at the Fed policymaking table has shifted noticeably more dovish during the second half of the year.
Those who had previously supported rate hikes, such as Fed Governor Christopher Waller, have notably shifted from their hawkish stance.
According to Brett Ryan of Deutsche Bank, everyone is a hawk when they are fighting inflation, and now they hold a different opinion as the upside threats to inflation have decreased.
The exact date of rate reductions would be the Federal Reserve's next question, according to Fed Chair Jerome Powell, after central bankers kept rates stable at 5.25%–5.50% last week. This comment sent bond yields plunging and caused markets to price in rapid-fire policy rate cuts beginning in March.
However, the trend of those bets follows the Fed leader's shift in tone, even though cuts occur later and more slowly than that, as officials have since attempted to signal.
According to Duy, one reason for this is that businesses that were able to raise prices this year will find it harder to do so next year and may need to reduce labor costs in order to preserve their profits. This is because lower inflation will permeate the economy.
Another justification for rate reductions in 2024 is that actual borrowing costs rise when inflation declines, so the Fed must lower the policy rate in order to avoid overtightening.
Before the Fed's next policy meeting on January 30-31, the new year will bring a tonne of more data, one of which will be a read on the US rate of unemployment, which is currently 3.7% and only one tenth of a point higher than it was when the Fed started hiking rates.
Rotation of Fed Voters
Economists from Deutsche Bank, BMO, and other institutions believe that the four Fed bank leaders who will take turns voting on policies under the Fed's rotation rules in the coming year will likely support fewer rate reductions than the four they'll be replacing.
Raphael Bostic, the head of the Atlanta Fed, is one of the 2024 voters. Despite being dovish in a way that he has expressed greater concern than some of his fellow policymakers about causing an excessive loss of jobs, he has stated that he thinks the Fed policy interest rate should remain in the range of 4.75% to 5% next year.
Projections released last week indicate that a lower range would be appropriate, according to the majority of his colleagues.
Bostic's fellow 2024 contenders are perceived as hawkish Richmond Fed President Thomas Barkin and Cleveland Fed President Loretta Mester; the final voter is a centrist, San Francisco Fed President Mary Daly.
Views on rates held by Fed policymakers do vary depending on the data. Mester, in particular, has seemed less certain in the past few months about the necessity of further tightening. Furthermore, the voting order itself is flexible: Mester's voting rights would be transferred to Chicago Fed chief Austan Goolsbee upon her retirement in June, provided the Cleveland Fed has not yet chosen another president.
In the end, the policy discussions that determine the decisions involve all 19 Fed policymakers, including those who do not cast ballots.
Many evolving factors have the potential to stall or even reverse inflationary progress, reinforcing the hawkish bias that has characterized the majority of those 19's views this year.
After six months of deflationary drops in prices, a prolonged closure of the Suez Canal due to attacks by Houthi militants on ships in the Red Sea may result in higher prices for goods.
If consumer confidence increases, spending in the future might be higher.
Easier financial circumstances could encourage borrowing and investment, as the 10-year yield has now dropped back to where it was when the Fed last increased rates in July.
Furthermore, job growth may continue to outpace forecasts, as it did for a large portion of last year.
The risk exists that inflation may not advance as expected, according to Nancy Vanden Houten of Oxford Economics. Overall, she thinks the Fed won't change its policies to deal with a geopolitical shock unless it is anticipated to be fairly long-lasting and that the current high policy rate will likely result in lower spending and job growth in the upcoming year.