Monetary policy that more heavily weighs its employment mandate is one that creates right tail risks for inflation. While the 9% inflation of 2022 was obviously unacceptable to even the most dovish dove, the recent 3% prints present a much more ambiguous situation. The Fed’s guidance of 3 rate cuts this year is easily justified amidst declining inflation, and the market’s pricing of 5-6 cuts can be justified if job growth actually slows. This is a dovish Fed that has seen the benefits of a hot labor market and they likely are going to try to maintain it. A rise in asset prices and modest inflation may be a price they are willing to pay.
- Date Posted:
- January 5, 2024
Even if the Fed does cut rates three times in 2024, as signaled on December 13, the Fed funds rate would end the year between 4.5% and 4.75%, still much higher than the virtually zero level when the Fed started its tightening campaign in March 2022. We believe the Fed will keep policy restrictive until it tames inflation back to its 2% annual target, a job that it has yet to fully accomplish. Additionally, long-term rates are high as well, and largely for reasons that aren’t directly tied to the Fed’s ongoing tight monetary policy. The so-called “term premium” has been rising due to a variety of factors including higher borrowing needs by the US Treasury, the loosening of yield-curve control in Japan, and reduced buying and diminished inventory of US sovereign debt held by China and other foreign nations.