Almost there

Today brought an early Christmas gift for Fed Chair Jerome Powell and his FOMC colleagues. Data from the US Bureau of Economic Analysis showed that the personal consumption expenditure (PCE) deflator fell 0.1 percent in November, its first month-on-month decline since the depths of the COVID pandemic in April 2020. That lowered the year-on-year increase to 2.6 percent. The core PCE deflator, which is the measure the FOMC follows more closely, rose 0.1 percent in November, but that served to lower the year-on-year increase to 3.2 percent from the 3.4 percent recorded in October. 

The Fed's 2 percent target specifically aims at controlling the consumer price index, but these improvements in the PCE deflators appear to indicate that policy is on the right track. Is the Fed close to achieving the almost mythical soft landing for the US economy?  Maybe so.  Revised data released on Thursday by the BEA showed that real GDP rose at a 4.9 percent annualized rate in Q3.  That's a slightly lower figure than the Bureau previously estimated, but it shows the economy still maintains considerable momentum even as inflation drifts slowly toward the target rate. 

This week's data certainly make it clear that the Fed tightening cycle is at an end, but they do not necessarily tell us much about when an easing cycle might begin. Arguably, the fact that the real economy is still moving ahead allows the Fed the luxury of waiting a little longer to start that cycle, just to be completely sure that CPI inflation is heading all the way back to the target.  The next FOMC announcement is due on February 1.  That will surely not bring a rate cut, though it may allow the Fed to start offering hints about timing, as it is set to table a "Statement on Longer-Run goals and Monetary Policy Strategy" on that day. Actual rate cuts may follow in Q2 of 2024, in line with the "dot plot" from the last FOMC meeting, which pointed to a total of 75 basis points in cuts for 2024 as a whole.