This Week's FOMC Meeting

This week's FOMC Meeting should not derail the stock market rally.  To be sure, Fed Chair Powell has continued to state that monetary policy decisions are data dependent, and the latest data -- showing solid growth and slightly elevated inflation -- argue for steady policy.   (Note that this week's US economic data are expected to fit this description, including  stronger November Retail Sales, Industrial Production and Housing Starts, as well as a benign PCE Deflator).  However, the Fed's focus appears to be on next year, not the current state of the economy.  And, Powell has made clear that officials believe its policy stance is too tight, with the risk that growth will slow too much ahead.  So, there is a good chance the Fed will cut by 25 BPs to 4.5-4.75% at the Meeting, while indicating, most likely in Powell's post-Meeting press conference, that the solid growth we're seeing means the Fed can take its time in adjusting the funds rate down to a non-restrictive level.

The revisions to the Fed's Central Tendency Forecasts, including the "dot" charts, may point to fewer rate cuts in 2025 than they had in September.  At the September FOMC Meeting, a majority of participants expected the funds rate to end 2025 in the 3.0-3.5% range.  Upward revisions to forecasts of Real GDP Growth and Inflation, as mentioned in last week's blog, would support a less aggressive approach to easing policy.

Nevertheless, last week's inflation data contained elements that should give the Fed hope that its 2% inflation target will be met at some point.  Although the CPI rose a high 0.3% m/m in November, a couple of outliers -- Used Car Prices and Hotel Rates -- were responsible for preventing a 0.2% print.  More encouraging was the slowdown in Primary Rent and Owners' Equivalent Rent to 0.2%.  Continuation of these rent components at this modest pace would increase the odds that the Fed's target will be met.  Also, the share of CPI components with 0.3% or higher prints fell to 44% from 56% in October, still high but moving in the right direction.  

Not surprisingly, the markets did not pay much attention last week to a normally ignored data release -- the revision to Compensation/Hour in the prior two quarters.  This time, however, the revisions were important as they undercut concern about inflationary pressures stemming from labor costs.  Compensation/Hour -- the broadest measure of labor costs -- was revised sharply lower, pushing down Unit Labor Costs (see table below).  They now look to be running well below the paces seen in 2023 --  in 2023 (Q4/Q4) Compensation/Hour rose 4.8% and Unit Labor Costs rose 2.1%.  These revisions should be a relief for Fed officials and bolster their confidence that inflation is on a downtrend.

 Compensation/Hr  Unit Labor Costs

q/q saar y/y q/q saar y/y

Q324

Revised 3.1 4.3 0.8 1.3

First-Print 4.2  5.5 1.9 3.4

Q224

Revised 1.0 4.8 -1.1 2.2

First-Print 4.6 5.7  2.4 3.2