When the prophet Jerome Powell speaks, the people listen. The Fed chair’s official policy statements are some of the most carefully crafted scripts in the world. Traders hang on Powell’s every word. If his crystal ball interprets falling rates, markets rally.
It’s tricky to predict the future. Yet that’s what many macroeconomists are paid to do. Their latest gamble: predicting where inflation will settle in the next year, a question with real-world implications rippling out these last three years. And again, we’re at the end of the year and everyone wants everyone else’s predictions for 2024.
The Fed leaders are no exception. Last week, they discussed likely cutting interest rates in 2024, though they didn’t rule out hiking them either. Markets celebrated: The S&P 500 jumped nearly three percent during the week’s sessions.
Last week’s policy statement came as a welcome surprise for many. Here’s how the Wall Street Journal’s Nick Timiraos put it:
Powell indicated officials were turning their attention to rate cuts because inflation has declined much faster than they expected. In their latest projections, they expected core prices, which exclude volatile food and energy items, to rise 3.2% this quarter from a year ago, down from their September projection of 3.7%. They see core inflation of 2.4% at the end of next year, down from their September expectation of 2.6%.
Government data released Wednesday morning suggest that core prices registered a very mild rise in November as measured by the Fed’s preferred inflation gauge, which will be released by the Commerce Department later this month. Wall Street forecasters said that could put core inflation on track to reach or even dip below 2% on a six-month annualized basis, and it could drop the 12-month rate to 3.1%. The Fed targets 2% annual inflation.
“I welcome the progress,” Powell said. “We just need to see more.”
More progress will be welcome, but at what cost? That’s the question on everyone’s mind. The other goal for the Fed, in addition to stable prices, as you remember, is to maintain employment. The current unemployment rate hangs at 3.7 percent, near historic lows.
We’ve talked before how these two rates work in tandem, and why it matters:
The Federal Reserve has two goals: to maintain stable prices and to maintain low unemployment. Right now, the two are hard to balance. Maintaining stable prices — that is, reducing inflation — requires increasing interest rates. That cools demand. However, cooling demand comes at a cost, namely, an increase in unemployment.
Lowering the inflation rate down can come at the expense of driving up the unemployment rate. That would be bad news for those seeking political office. We talked about this during the midterms last year, but next year is even more important to consider
Why it matters
A few complicating factors will arise in the next year. One, China. And two, the election(s).
While the U.S. experiences inflation, China experiences deflation. That’s a big deal, given that China is the world’s second largest economy behind the U.S. A brief Axios article summed up its problems this way:
The big picture: China’s economy has stumbled as it tried to emerge from the government’s zero-COVID lockdown policies. The country is also facing a massive housing bust, the rapid outflow of capital, and a loss of confidence among both domestic businesses and consumers who are uncertain about President Xi Jinping’s commitment to economic growth.
We’ve discussed issues like China’s housing bust and local debt before. While that’s a cause for concern, the government’s policies have also driven out huge amounts of capital from foreign investors. And many manufacturers have relocated their facilities to nearby Vietnam or even to Mexico in efforts to diversify their supply chain away from such strict policies.
As for the election — or elections — the economic and the political scenes have a lot of overlap. One fund manager told me last week that his funds are doing so well because he’s trading on the belief that the Fed would never let the Democrats suffer a poor economy in an election year. Whether that’s true or not remains to be seen, but the sentiment is pervasive on Wall Street: Who wins the U.S. election has massive implications for who influences the economy.
But it’s not just the U.S. that’s heading into election season. Major countries around the world are holding presidential and parliamentary elections. The World Economic Forum is calling 2024 a “record year” for elections, with voters heading to the polls in 50 countries. We can’t overlook the connection between the U.S. economy and the political performance in these countries. As the saying goes, “When America sneezes, the world gets a cold.” It works the other way, too, if many countries sneeze at once.
India will elect its next prime minister, Mexico and South Africa their next presidents, the EU its parliamentary officers, and other countries like Taiwan, Indonesia, Russia, Iran, and Pakistan are holding major elections. Many of these countries are in the most influential global economic bloc: the Group of 20, or G20. The G20 countries represent about 85 percent of global GDP. What happens politically impacts what happens economically.
No one knows what will happen, of course, but for these reasons and more, economists are heading into 2024 with a bit of trepidation.