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The Federal Reserve kept interest rates unchanged on Wednesday, with Fed Chair Jerome Powell dismissing suggestions that the central bank would begin cutting rates in March, drawing most attention from investors.
But the Fed chair also hammered home the idea that good economic data continues to be good news for central banks, and that there needs to be a period of “bad news is good news” before central banks move forward with rate cuts. He also tried to avoid taking advantage of investors. This year's interest rate.
“So I think we're looking at stronger growth. We don't see that as an issue,” Powell said. “At the moment, we expect strong growth. We want a strong labor market. We don't want a weak labor market. We expect inflation to decline over the last few years. “We expect it to continue to decline in the past six months.” ”
Last week, the first estimates of GDP for the fourth quarter showed the economy grew at an annual rate of 3.3% in the last three months of 2023. Real GDP grew by 3.1% in the fourth quarter compared to the fourth quarter of 2022. The unemployment rate as of December was 3.7%.
On the inflation front, core PCE, the Fed's preferred measure, rose at an annual rate of 2.9% in December, the weakest growth since March 2021. The Fed targets 2% inflation.
On a six-month annualized basis, core PCE reached 1.9% in December, below the Fed's target. Looking at this data on a three-month annualized basis, core PCE fell to 1.6% last month.
The Fed said in a statement that it needed to see “further developments” in inflation before cutting rates.
Asked multiple times during Wednesday's press conference about what exactly constitutes greater progress, Powell emphasized time over scale. His clear observation that next month's March cuts are “probably not” the most likely outcome was the strongest comment that helped make this case.
Still, Powell emphasized that interest rates have “probably” peaked this cycle.
Back in December 2022, Fed officials expected GDP to expand by just 0.5% over the next year. The unemployment rate was expected to rise to 4.6%. And after the brutal bear market of 2022, most Wall Street strategists were predicting a recession and further declines in the stock market in 2023.
That the Fed would have to pay an economic price in its efforts to curb inflation was not just a prediction, it was a foregone conclusion. For the Fed, for investors, and for the public.
And, of course, the Fed's actions were not without cost. Inflation peaked at 9.1% in June 2022. For the two years from April 2021 to April 2023, real wage growth was negative. The aforementioned 2022 bear market was one of the most difficult years on record for savers investing in a diversified portfolio of stocks and bonds.
But continued economic expansion is a cause for concern, a view Powell hopes to settle in 2024. It remains to be seen whether Mr. Powell can win the trust of investors and the public in this regard.
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