A Holding Pattern

This time around, however, we expect the skips to stick, as the Fed enters a holding pattern in the face of slowing inflation. Instead of fighting back in face of these easing price pressures, we believe policymakers will attempt to circle while the economy decides on its own what type of landing to attempt. There is a modest chance that inflation reaccelerates into early-2024, forcing Powell’s hand, but that is not now our base case. In all probability, the hiking cycle is over.

Economic data since the FOMC met has been generally neutral-to-positive for both growth and moderate for inflation, a rare and welcome combination. Jobs gains are continuing, though they have downshifted, and wages are expanding at their slowest rate in more than a year according to Atlanta Fed data. Meanwhile, non-residential investment seems to be accelerating as CEO confidence rebounds. But the most remarkable shift has been in inflation. Over the last three months, the annual run-rate of the core CPI has slowed to +2.4%, the slowest pace since early-2021 and right in line with the Fed’s 2% core PCE target (the PCE runs 0.4-0.6% below the CPI). Short-term inflation readings bring with them lots of noise—measuring a process in a single monthly data point is not a great exercise—and there is a chance inflation reaccelerates into 4Q after annual healthcare cost data reset, but for the moment, the price picture is pretty promising.

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