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The Federal Reserve left interest rates unchanged on Wednesday, and Fed Chair Jerome Powell brushed off suggestions the central bank will start cutting rates in March, drawing most of the attention from investors.
But the Fed chair also tried to hammer home the notion that good economic data remains good news for the central bank and disabuse investors of the idea that a period of “bad news is good news” will be required for the central bank to proceed with lower interest rates this year.
“So, I think we look at stronger growth, we don’t look at it as a problem,” Powell said. “At this point, we want to see strong growth. We want to see a strong labor market. We’re not looking for a weaker labor market. We’re looking for inflation to continue to come down as it has been coming down for the last six months.”
Last week, the first estimate of fourth quarter GDP showed the economy grew at an annualized rate of 3.3% in the final three months of 2023. Compared to the fourth quarter in 2022, real GDP grew 3.1% in the fourth quarter. As of December, the unemployment rate stood at 3.7%.
On the inflation side, core PCE, the Fed’s preferred measure, showed an annual increase of 2.9% in December, the slowest 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. Look at this data on a three-month annualized basis, and core PCE fell to 1.6% last month.
In its statement, the Fed said it would need to see “greater progress” on inflation before cutting rates.
Pressed several times during Wednesday’s press conference on what, exactly, would constitute greater progress, Powell emphasized time over magnitude. His explicit note that a March cut is “probably not” the most likely outcome next month was his most forceful comment in service of this argument.
Still, Powell emphasized interest rates have “likely” reached their peak for this current cycle.
Back in December 2022, Fed officials had expected GDP to expand just 0.5% in the year ahead; the unemployment rate was forecast to rise to 4.6%. And most Wall Street strategists were penciling in a recession and a further drop in the stock market in 2023 after the brutal bear market of 2022.
That there would be an economic price to pay amid the Fed’s efforts to bring down inflation was not just an expectation, but a foregone conclusion. Both for the Fed, investors, and the public.
And, of course, the Fed’s actions did not come without costs — inflation peaked at 9.1% in June 2022. For a two-year stretch between April 2021 and April 2023, real wage growth was negative. The aforementioned bear market of 2022 was one of the most challenging years on record for savers investing in a diversified portfolio of stocks and bonds.
But that a continued economic expansion is something to be feared is a view Powell hopes to put to rest in 2024. Whether he’ll gain the trust of investors and the public on this count remains to be seen.
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