Vital Markers On the Path Through our Economic Landscape
January 29, 2024
By Anders Saxten
With the Federal Reserve serving as our guide, we stand at a pivotal point in our journey through the economic landscape. As we approach the upcoming Fed meeting on Wednesday, we have arrived at a crossroads where the Fed once again will decide upon the future path of interest rates. As of Friday, Jan. 26, investors expect the Fed to maintain its resolve and keep the Federal Funds Rate steady at 5.25-5.50% with a 97.4% certainty. Let’s unpack the economic landscape, with markers like Gross Domestic Product (GDP), Initial Jobless Claims, and Personal Consumption Expenditures (PCE), to grasp why the Fed is anticipated to keep rates unchanged.
Gross Domestic Product (GDP)
On Thursday, Jan. 25, Gross Domestic Product (GDP), a measurement of the value of all goods and services produced by the economy, grew at an annualized rate of 3.3% for the fourth quarter of 2023. This was above expectations of 2% but lower than the 4.9% reading in the third quarter. This shows that, despite rising interest rates, the economy remained resilient throughout the year, primarily due to strong consumer spending which makes up over two-thirds of the U.S. economy. For calendar year 2023, the economy expanded by 2.5%. The Federal Reserve managed to increase interest rates and lower inflation without damaging the overall growth of the economy in its attempt to achieve a soft landing.
Initial Jobless Claims
Initial Jobless Claims, a measurement of the number of individuals who filed for unemployment insurance for the first time, came in at 214k last week, above expectations of 200k. The measurement is an important economic marker when considering the Fed’s dual mandate of price stability and low unemployment. This reading is consistent with the overall trend in 2023.
Personal Consumption Expenditures (PCE)
The leading mark as the Fed navigates the economic landscape is the Personal Consumption Expenditures (PCE), the Fed’s preferred inflation indicator, which came in at 2.6% YoY on Friday, Jan. 26. While the number has continued to decline throughout 2023, it remains above the 2% target, indicating that we still have some way to go. The key takeaway, however, is that inflation continues to cool while the economy, in terms of GDP growth and employment, remains strong going into 2024.
What Comes Next?
While the market doesn’t expect the Fed to initiate rate cuts on Wednesday, the market does price in future rate cuts of 150 basis points or 1.5 percentage points, starting in May. With inflation still above the 2% target, our economic journey is not yet over. If you have any questions or concerns about the economic landscape, please reach out to your Wealth Management Advisor. Your financial success matters to us!