Weekly Review & Outlook: December 11, 2023

The last remaining major macroeconomic updates of 2023 are on tap for this week. Focus is squarely on the November Consumer Price Index (CPI) report and the final Federal Open Market Committee (FOMC) meeting. The November market rallies in equities and Treasuries have carried into the first week of December on the expectation that the Fed terminal rate has been reached and there is an opportunity for the “Immaculate Landing” in 2024. While I have commented since late September that I believed this cycle’s terminal rate was now in, my judgment on the 2024 economic growth path is uncertain with key dependencies on both future monetary and fiscal policy decisions.

Ahead of the final 2023 FOMC meeting, November CPI data will be released. As of October CPI inflation as calculated by BLS had fallen to a 1-year headline change of 3.2% which compares dramatically to the October 2022 1-year reading of almost 8%. Core CPI which excludes more volatile food and energy costs was higher 4.0% from a year ago. More promising for the price stability outlook is the annualized 6-month core CPI trend of 3.2%. The November 2022 roll month increase was 0.3% making for a reasonable likelihood that November 2023 1-year core CPI is flat to incrementally lower. Also positive for the outlook is that the next 6 roll months have an annualized rate of 5.1% setting up continued easy comparables for inflation to trend further towards the Fed’s 2% target.

As a side note, there are pieces of the core CPI that are challenging to reconcile with the real world. For example, health insurance represents just 0.525 units of 100.000 in the CPI basket or 0.67% in the core basket. The current 1-year change for health insurance non-seasonally adjusted as calculated by BLS is -34%. Health insurance is calculated by BLS to be flat from September 2018. For comparison the Kaiser Family Foundation survey found health insurance costs higher by 7% in 2023 and even just the average worker contribution is a significantly higher portion of the overall consumer basket than in the CPI model. With expectations for another mid-single digit increase in private health insurance cost for 2024, this is just 1 of several components of forward consumer price pressures that is questionably captured by the BLS model.

My expectations for the FOMC meeting are for the policy target rate to remain unchanged. This is the overwhelming consensus. Most interesting will be the updated Summary of Economic Projections (SEP) and the new median Fed Funds projection for year end 2024. The September SEP projected 1 final ¼ point hike in 2023 followed by a ½ point in cuts over the course of next year. The current CME FedWatch tool forecast is for an upper bound rate of 4.5% at 2024 year end. I do not expect the SEP median projection to fall that far. However, I do believe and unchanged SEP median of 5.1% would be viewed as hawkish. Arguments that the Fed is again behind in their policy actions and in error could begin with the updated Taylor Rule utility which shows a prescriptive target rate range today as low as 4 ¾%. The yield curve would certainly look healthier with the short end half a point lower in yield. Regardless of the FOMC decision, the inflation fight without causing major economic stress, in my opinion, will remain a struggle as long as fiscal policy is bipartisan, multi-trillion dollar deficit spending with Debt/GDP at 120% and trending higher.