The takeaway …
Loretta Mester, president and chief executive officer of the Federal Reserve Bank of Cleveland shared with CNBC her view that while the recent consumer price index print for October 2023 was positive, the Federal Reserve System was not going to react to one data release.
Inflation in October, as measured by the consumer price index, remained unchanged from September with prices increasing in October by 0.4%. Over a 12-month period, consumer prices increased by 3.2%.
It may be worth mentioning that the producer price index fell 0.5% in October and during the preceding 12-month period, producer prices fell 1.3%.
When asked by CNBC’s Steve Liesman if the recent inflation measures provided an “all clear” for the Federal Reserve to stop raising its overnight rates, President Mester said, “no.” She did see a soft landing for the economy and pointed out that she expected below trend growth, a mechanism for getting inflation down.
Just a couple days ago, Philip N. Jefferson, vice-chair of the Board of Governors of the Federal Reserve System, shared during a conference on global risk and uncertainty his views on monetary policy during periods of uncertainty. While the resilience narrative has been uttered by market participants, notably Wall Street talking heads, Vice-chair Jefferson reminded the audience that while the level of economic uncertainty was down from pandemic levels, uncertainty is still elevated.
He also reminded the audience that much of uncertainty was related to inflation; that a lack of information increases uncertainty; and that higher illiquidity exacerbates uncertainty. If uncertainty exists, response to shocks should be met with caution, noted Vice-chair Jefferson.
Market participants seem more certain than Vice-chair Jefferson, at least about where rates are heading. Morgan Stanley reportedly expects around 12 rate cuts between June 2024 and the end of 2025. Yahoo! Finance reports that Morgan Stanley expects the Federal Reserve’s overnight rate to fall to 2.375% by the end of 2025.
Goldman Sachs is reportedly taking the more cautious approach, expecting the Fed to start cutting rates in the last quarter of 2024 with rates settling around 3.5 to 3.75%.
The private sector has to sell its book and while I don’t blame them, we should stay focused on the Federal Reserve’s mindset. They are consistent about prioritizing data versus market sentiment, although you should not expect the Fed to ignore market sentiment. If that were the case, the Fed would not conduct its survey of market participants.
Alton Drew
16 November 2023
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The rates ….
30-Day Federal Funds futures: 94.755.
Effective federal funds rate: 5.33%.
Discount Window rate: 5.50%.
Interest on Reserve Balances: 5.40%.
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