"Dancing With The Doves"

MONETARY

• In the final FOMC meeting of 2023, the Federal Reserve opted to leave its target federal funds rate unchanged at the current level of 525-550bps, a move that was widely expected. As is customary, Chairman Powell highlighted multiple developments pertaining to the economy with regards to future rate hikes, inflation, and the labor market¹
  • Chairman Powell indicated that the Fed is likely done with hiking interest rates for the Rate Hike Cycle, however; did note that if economic data should suggest a re-assessment of that position a change of course would be warranted. Over the past year, the market and Fed have struggled to predict what level of Federal Funds Rate designated the final Terminal Rate ¹
    • (Powell) “While we believe that our policy rate is likely at or near its peak for this tightening cycle, the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. We are prepared to tighten policy further if appropriate”¹
  • Regarding inflation, Chairman Powell noted that inflation has been trending in the correct direction over the past year, however; maintained the stance that additional progress is needed, even though longer-term expectations of inflation appear to be very well anchored at more normalized levels¹
    • (Powell) “The lower inflation readings over the past several months are welcome, but we will need to see further evidence to build confidence that inflation is moving down sustainably toward our goal. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets”¹
  • Powell also noted that the job market remains very strong with hiring continuing at robust levels, despite the economy operating well past a level that many consider to be the level of Maximum Employment. Additionally, a continuation of easing in labor supply/demand forces was observed as well.¹
    • (Powell) “The labor market remains tight, but supply and demand conditions continue to come into better balance. Over the past three months, payroll job gains averaged 204,000 jobs per month, a strong pace that is nevertheless below that seen earlier in the year.” “Strong job creation has been accompanied by an increase in the supply of workers. The labor force participation rate has moved up since last year, particularly for individuals aged 25 to 54 years”¹
• The final FOMC meeting of 2023 was also accompanied by an updated set of internal economic projections by FOMC participants in the Fed’s Summary of Economic Projections Updated projections for GDP Growth, Inflation, Unemployment, and Federal Funds Target Rates are included²
  • 2023’s estimate for GDP growth was revised upward to a level of 2.6% from a previous level of 2.1%. 2024 and 2025 GDP growth projections were relatively unchanged and stand at 1.4% and 1.8% respectively²
    • (Powell) “Higher interest rates also appear to be weighing on business fixed investment. In our Summary of Economic Projections, Committee participants revised up their assessments of GDP growth this year but expect growth to cool, with the median projection falling to 1.4 percent next year.”²
  • 2023, 2024, and 2025 projections for unemployment were unchanged at 3.8%, 4.1%, 4.1% respectively²
  • 2023’s estimate for PCE Inflation (Headline) was revised downward to a level of 2.8% from 3.3%. Additionally, 2024 and 2025 Inflation projections were relatively unchanged at levels of 2.4% and 2.1%²
  • The most significant update to the Fed’s Summary of Economic Projections came regarding internal projections of where its Target Federal Funds Rate would be moving forward.
    • Projections for 2024’s Target Federal Funds Rate were revised downward to a median level of 4.6% from the prior level of 5.1%, indicating a more internally dovish Fed than previously telegraphed²
    • Projections for 2025’s Target Federal Funds Rate were revised downward to a median level of 3.6% from the prior level of 3.9%²
    • These adjustments were largely seen as the Fed telegraphing not only the end of the Rate Hike Cycle, but also the timeline for the start of the Rate Cut Cycle²

GEOPOLITICS

• The People’s Bank of China pushes nearly $50 billion of stimulus funds into banks during the month of December, a move that suggests the central bank could be implementing support for housing and infrastructure sectors to stave off the effects of a broader property bubble collapse³
  • This marked the largest increase in the central bank’s Pledged Supplemental Lending program since November 2022³
  • China is currently in the midst of dealing with the aftermath of a broad property bubble collapse, which saw many of the country’s major property developers careen into bankruptcy and default on their obligations³
    • Years of excess property construction and egregious deficit spending created a backdrop of overly leveraged balance sheets at major property developers which ultimately resulted in those firms needing to declare bankruptcy³
    • For many years, the Chinese Government prioritized construction and general development of property in many regions of the country in an effort to bolster economic growth, however; excess development eventually led to supply/demand imbalances and unfavorable economics for those involved³

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

 

ANNOTATIONS

1. Federal Reserve. “Transcript of Chair Powell’s Press Conference”. December 13, 2023
2. Federal Reserve. “Summary of Economic Projections”. December 13, 2023
3. Bloomberg. “China Injects $50 Billion Into Policy Banks in Stimulus Push”. January 2, 2024.