The annual rotation in the US Federal Reserve's rate-setting committee reveals a more restrained outlook among FOMC members with voting rights in 2024 compared to their 2023 counterparts. That being said, this shift is unlikely to impact the probability of interest rate cuts next year.
In fact, some analysts suggest the opposite scenario: if inflation declines more rapidly than anticipated, Fed members might be inclined to implement larger rate cuts than indicated in the latest forecasts released last week.
A major test will be the release of the Personal Consumer Expenditure Price Index for November, the Fed's preferred measure of inflation. Economists are currently expecting the rate to remain steady from the previous month, maintaining annual inflation within two-tenths of a percentage point of the Fed's 2% target over the past six months.
Throughout the year's second half, the Fed's committee adopted a more moderate stance. Notably, committee members who had previously advocated for a tougher approach, including Fed Governor Christopher Waller, have shifted away from their earlier support for rate hikes.
There's also a compelling reason to consider rate cuts in the coming year: as inflation declines, maintaining the base rate at a steady level would lead to a rise in real borrowing costs. To prevent excessive tightening, the Fed may find it necessary to implement rate cuts.
Leading up to the Fed's next meeting on January 30-31, the new year will bring additional data, including the US unemployment rate, currently at 3.7%—just a tenth of a point higher than when the Fed initiated interest rate hikes.
The rotation of Fed voters could further contribute to the evolving landscape. The consensus among economists at Deutsche Bank, BMO, and other institutions is that the four Federal Reserve bank presidents set to vote next year, following the established rotation rules, seem inclined to support fewer rate cuts compared to the four individuals they are replacing.
A notable figure among the 2024 committee members will be Raphael W Bostic, the president and chief executive officer of the Federal Reserve Bank of Atlanta. While expressing some concerns about job losses, Bostic tends to favor ending the Fed's policy rate in the 4.75%-5% range unlike most of his colleagues who prefer the lower range reflected in the latest forecasts.
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