Last word of 2023 goes to Jay Powell

Jay hawk. Having the last word doesn’t always ensure winning the fight. But on Wednesday, U.S. Federal Reserve Chair Jerome Powell will try to have the final say of the year in his ongoing tussle with the markets. The central bank is set to keep interest rates steady and Powell will attempt to persuade investors that aggressive rate cuts aren’t imminent despite falling inflation. If he is successful, stocks and bonds will have a tough holiday period. If he fails, the Fed’s plans for next year could be derailed.The market thinks the Fed will cut rates from the current 5.25% to 5.5% to around 4.25% in the next 12 months, according to derivatives prices collected by LSEG. Powell has different plans. He is expected to keep rates unchanged following the two-day meeting with other Fed bankers, which starts today. More importantly, having missed the inflationary spike on the way up, he doesn’t want to run the risk of cutting them prematurely.Markets could do his job for him. Higher bond yields increase the cost of borrowing, which helps to reduce consumption and quell inflation. But Treasury investors, not to be gaslit, are doing the opposite, reading good economic news as a green light for rate cuts.Against the odds, the U.S. economy is gliding towards a rare so-called soft landing, with inflation converging towards the Fed’s 2% target without a recession. The core personal consumption expenditure index, which excludes food and energy prices and is the Fed’s preferred inflation measure, is running at an annualised rate of around 2.1% over the past six months. And although the unemployment rate is low, there are no signs of an inflationary wage spike.Powell could lower borrowing costs next year and still cool price growth as long as borrowing costs stay higher than inflation, especially if core PCE drops to 2.6% in 2024 from 3.5% now, as the Fed predicts. If markets continue to ignore Powell’s pleas, a rally in both stocks and bonds might continue. The S&amp;P 500 Index has gained 7.7% since October, including reinvested dividends, and is on track to return more than 20% for 2023. Yields on 2-year U.S. Treasuries, which move inversely to prices, have fallen from 5.2% in October to 4.7% now.But that also makes Powell’s life more difficult. Real-world rates are not dictated just by what the Fed would like, but also by markets. As long as market yields are low, Powell can make policy and argue his case, but he will find it hard to make a difference.Context NewsThe U.S. Federal Reserve will announce its last decision of 2023 on interest rates on Dec. 13, following a two-day meeting. According to a Reuters poll of economists, the central bank will not increase rates at the meeting and will hold them steady at the current level of 5.25% to 5.5% until at least July. U.S. consumer prices rose at an annual rate of 3.1% in November, in line with market expectations and slightly lower than the 3.2% growth rate recorded in October, according to official data released on Dec. 12.

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Last word of 2023 goes to Jay Powell

The US Federal Reserve will announce its last decision of 2023 on interest rates on Dec. 13, following a two-day meeting.

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