Two important events this week could determine the future of Fed rate policy

Markets
have
become
less
convinced
that
the
Federal
Reserve
is
ready
to
press
the
button
on
interest
rate
cuts,
an
issue
that
cuts
at
the
heart
of
where
the
economy
and
stocks
are
headed.

Two
big
economic
reports
coming
up
this
week
could
go
a
long
way
toward
determining
at
least
which
way
the
central
bank
policymakers
could
lean
—
and
how
markets
might
react
to
a
turn
in
monetary
policy.

Investors
will
get
their
first
look
at
the
broad
picture
of
fourth-quarter
economic
growth
for
2023
when
the
Commerce
Department
releases
its
initial
gross
domestic
product
estimate
on
Thursday.
Economists
surveyed
by
Dow
Jones
are
expecting
the
total
of
all
goods
and
services
produced
in
the
U.S.
economy
to
have
grown
at
a
1.7%
pace
for
the
final
three
months
of
2023,
which
would
be
the
slowest
since
the
0.6%
decline
in
Q2
of
2022.

A
day
later,
the
Commerce
Department
will
release
the
December
reading
on
the
personal
consumption
expenditures
price
index,
a
favorite
Fed
inflation
gauge.
The
consensus
expectation
for

core
PCE
prices,
which
exclude
the
volatile
food
and
energy
components,
is
0.2%
growth
for
the
month
and
3%
for
the
full
year.

Both
data
points
should
garner
a
lot
of
attention,
particularly
the
inflation
numbers,
which
have
been
trending
towards
the
Fed’s
2%
goal
but
aren’t
there
yet.

“That’s
the
thing
that
everybody
should
be
watching
to
determine
what
the
Fed’s
rate
path
will
end
up
being,”
Chicago
Fed
President
Austan
Goolsbee
said
during
an
interview
Friday
on
CNBC.
“It’s
not
about
secret
meetings
or
decisions.
It’s
fundamentally
about
the
data
and
what
will
enable
us
to
become
less
restrictive
if
we
have
clear
evidence
that
we’re
on
the
path
to
get”
inflation
back
to
target.

The
releases
come
amid
a
market
snapback
about
where
the
Fed
is
heading.

As
of
Friday
afternoon,
trading
in
the
fed
funds
futures
market
equated
to
virtually
no
chance
the
rate-setting
Federal
Open
Market
Committee
will
cut
at
its
Jan.
30-31
meeting,
according
to
CME
Group
data
as
indicated
through
its

FedWatch
Tool.
That’s
nothing
new,
but
the
odds
for
a
cut
at
the
March
meeting
fell
to
47.2%,
a
steep
slide
from
81%
just
a
week
ago.

Along
with
that,
traders
have
taken
one
expected
cut
off
the
table,
reducing
the
outlook
for
easing
to
five
quarter
percentage
point
decreases
from
six
previously.

The
change
in
sentiment
followed
data
showing
a
stronger-than-expected

0.6%
growth
in
consumer
spending
for
December
and

initial
jobless
claims
falling
to
their
lowest
weekly
level
since
September
2022.
On
top
of
that,
several
of
Goolsbee’s
colleagues,
including

Governor
Christopher
Waller,
New
York
Fed
President
John
Williams
and

Atlanta
Fed
President
Raphael
Bostic,
issued
commentary
indicating
that
at
the
very
least
they
are
in
no
hurry
to
cut
even
if
the
hikes
are
probably
done.

“I
don’t
like
tying
my
hands,
and
we
still
have
weeks
of
data,”
Goolsbee
said.
“Let’s
take
the
long
view.
If
we
continue
to
make
surprising
progress
faster
than
was
forecast
on
inflation,
then
we
have
to
take
that
into
account
in
determining
the
level
of
restrictiveness.”

Goolsbee
noted
that
one
particular
area
of
focus
for
him
will
be
housing
inflation.

The

December
consumer
price
index
report
indicated
that
shelter
inflation,
which
accounts
for
about
one-third
of
the
weighting
in
the
CPI,
rose
6.2%
from
a
year
ago,
well
ahead
of
a
pace
consistent
with
2%
inflation.

However,
other
measures
tell
a
different
story.

A
new
Labor
Department
reading
known
as
the

New
Tenant
Rent
Index,
indicates
a
lower
path
ahead
for
housing
inflation.
The
index,
which
measures
prices
for
new
leases
that
tenants
sign,
showed
a
4.6%
decline
in
the
fourth
quarter
of
2023
from
a
year
ago
and
more
than
double
that
quarterly.

“In
the
very
near
term,
we
think
the
inflation
data
will
cooperate
with
the
Fed’s
dovish
plans,”
Citigroup
economist
Andrew
Hollenhorst
said
in
a
client
note.

However,
Citi
foresees
inflation
as
stubborn
and
likely
to
delay
the
first
cut
until
at
least
June.

While
it’s
unclear
how
much
difference
the
timing
makes,
or
how
important
it
is
if
the
Fed
only
cuts
four
or
five
times
compared
to
the
more
ambitious
market
expectations,
market
outcomes
have
seem
linked
to
the
expectations
for
monetary
policy.

There
are
plenty
of
factors
that
change
the
outlook
in
both
directions
—
a

continued
rally
in
the
stock
market
might
worry
the
Fed
about
more
inflation
in
the
pipeline,
as
could
an
acceleration
in
geopolitical
tensions
and
stronger-than-expected
economic
growth.

“By
keeping
the
potential
alive
for
inflation
to
turn
up,
these
economic
and
geopolitical
developments
could
put
upward
pressure
on
both
short-term
rates
and
long-term
yields,”
Komal
Sri-Kumar,
president
of
Sri-Kumar
Global
Strategies,
said
Saturday
in
his
weekly
market
note.

“Could
the
Federal
Reserve
be
forced
to
raise
the
Federal
Funds
rate
as
its
next
move
rather
than
cut
it?”
he
added.
“An
intriguing
thought.
Don’t
be
surprised
if
there
is
more
discussion
along
these
lines
in
coming
months.”