12/16 - Weekly Economic Highlights

As expected at the December 14th meeting, the Federal Open Market Committee (FOMC) raised the fed funds target rate by 50 basis points to a range of 4.25 – 4.50%, in a downshift from four consecutive 75 basis point hikes. The decision was unanimous, and there was no change to the November statement. The sentiment was hawkish, indicating that “ongoing increases” in the fed funds rate are likely appropriate, citing continued labor market imbalances. The Summary of Economic Projections indicated a peak median forecast of 5.1% in 2023, with a hawkish tilt and little dispersion in the estimates. No rate cuts were forecast in 2023, with rate reductions to 4.1% in 2024, and reaching the neutral rate in the long-run beyond 2025. FOMC members forecasted a higher fed funds rate, slower GDP growth, higher inflation, and higher unemployment in 2023 than in the September projections.

While the FOMC statement and projections were clear in the forecasted rate path for 2023, the market consensus tends to diverge. Fed funds futures indicate a peak target rate of approximately 4.90% in May, declining to around 4.40% by the end of 2023, implying 0.50% in Fed rate cuts next year. We believe the FOMC will continue to implement restrictive monetary policy at a slower pace and hold rates at restrictive levels for some time until inflationary pressures subside and remain in the Fed’s target range.

A lower-than-expected Consumer Price Index (CPI) reading provided more impetus for the Fed’s step down in this week’s rate hike. The CPI increased less than expected in November, up 7.1% year-over-year versus consensus expectations for 7.3%, and down from 7.7% in October. The Core CPI, which excludes volatile food and energy components, rose 6.0% year-over-year, down from a 6.3% increase in October. The pace of price gains for used cars and energy decelerated; however, shelter and food prices remain stubbornly high. Although inflation may have peaked, levels remain well above the Fed’s target of around 2%, which is likely to keep the Federal Reserve on the path of tightening monetary policy, albeit at a less aggressive pace.

Retail sales declined more than expected in November at -0.6% month-over-month and +6.5% year-over-year, possibly suggesting some loss of momentum in consumer demand for goods amid high inflation and shifting preferences toward services. Additionally, Amazon’s Prime Day may have pulled forward some holiday spending activity into October from November. Consumers continue to dip into savings and assume more debt.

US Treasury rates declined this week with the Fed’s downshift in the pace of tightening. The 2-year declined approximately 11 basis points to 4.24%, the 5-year fell about 12 basis points to 3.65% and the 10-year dropped 8 basis points to 3.50%. (as of Friday morning). The yield curve inversion narrowed slightly but remains deeply inverted at approximately -74 basis points between the 2-year and 10-year treasury. We remain disciplined with our strategies in this volatile and uncertain market.

Next Week:

Housing Starts, Building Permits, Existing Home Sales, Conference Board Consumer Confidence, Chicago Fed National Activity Index, Gross Domestic Product, Leading Economic Indicators, Personal Consumption Expenditures, Durable Goods Orders, New Home Sales, University of Michigan Consumer Sentiment

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© 2022 Chandler Asset Management, Inc. An Independent Registered Investment Adviser. Data source: Bloomberg, Federal Reserve, and the US Department of Labor. This report is provided for informational purposes only and should not be construed as specific investment or legal advice. The information contained herein was obtained from sources believed to be reliable as of the date of publication, but may become outdated or superseded at any time without notice. Any opinions or views expressed are based on current market conditions and are subject to change. This report may contain forecasts and forward-looking statements which are inherently limited and should not be relied upon as an indicator of future results. Past performance is not indicative of future results. This report is not intended to constitute an offer, solicitation, recommendation, or advice regarding any securities or investment strategy and should not be regarded by recipients as a substitute for the exercise of their own judgment. Fixed income investments are subject to interest rate, credit, and market risk. Interest rate risk: The value of fixed income investments will decline as interest rates rise. Credit risk: the possibility that the borrower may not be able to repay interest and principal. Low-rated bonds generally have to pay higher interest rates to attract investors willing to take on greater risk. Market risk: the bond market, in general, could decline due to economic conditions, especially during periods of rising interest rates.