The Fed Has Pivoted
It’s a New Fed
Our task here is to contextualize the implications of the new information surface and develop prospects for new developments.
This starts with a brief review of three key pieces of new information.
With information in hand from the CPI report on Tuesday, and the PPI report on Wednesday, reasonable estimates have been developed for the November PCE report, which is to be released on December 22nd.
The downside surprise in the inflation data was factored into the Fed’s Summary of Economic projections, released on Wednesday, December 13th.
Finally, on Thursday, December 14th, a strong retail sales print was released, which help lift the Atlanta Fed GDPNow Q4 forecast to 2.6%, up from 1.2%.
Working backwards, the revised Q4 GDP forecast removes any near-term urgency for policy rate cuts to align policy with the projected disinflationary trends.
This takes any cuts in January off the table.
A January policy rate cut was never the default to begin with. It was predicated on a left tail event of a Sahm Rule trigger in the December employment report (aka, non-farm payrolls).
Strategic optics dictate that the Fed will want to be confident that inflation will truly return to 2%. Therefore passing on a January cut is within this framework.