Commentary: As Inflation Cools, Fed Keeps Rates Steady, Slowdown Expected in 2024

by Robert Romano


The Federal Reserve on Dec. 13 held the Federal Funds Rate—the rate at which banks lend to each other—steady at 5.25 percent to 5.5 percent, as the consumer inflation once again cooled to 12-month average level of 3.1 percent, according to the latest data compiled by the Bureau of Labor Statistics.

Leading the cooldown were drops in energy prices as gasoline dropped 6 percent in November, following a 5 percent drop in October.

Similarly, fuel oil was down another 2.7 percent in November, following a 0.8 percent drop in October.

On the other hand, piped gas service was up by 2.8 percent in November, following a 1.2 percent increase in October.


And electricity was up 1.4 percent in November, following 1.3 percent and 0.3 percent increases in September and October, respectively.

That indicates there might still be some stickiness to the inflation as it impacts energy.

When inflation is calculated minus food and energy is still grew at an annualized 4 percent the past 12 months, indicating that once the volatility of food and energy is removed, prices are still steadily increasing.

For example, transportation services were up 1.1 percent in November, following 2 percent, 0.7 percent and 0.8 percent increases in August, September and October. Overall, transportation is up 10.1 percent the past 12 months.

Shelter has steadily increased 6.5 percent the past 12 months, including 0.4 percent in November, following 0.6 percent and 0.3 percent increases in September and October.

And used cars once again jumped 1.6 percent after steadily falling all year long. They are still down 3.8 percent the last 12 months, even with the November increase.

All of which indicates the economy still has some juice left in it. Inflation will slowdown and then collapse towards the end of the business cycle, which is clearly nearing or already at hand.

Sometimes, a slowdown is accompanied by one final push in inflation, as during the Great Recession, when inflation peaked at 5.6 percent in July 2008. By then, the recession was already underway, and the U.S. economy was shedding jobs. But it wasn’t until demand collapsed towards the end of 2008 all the way through 2009 that vast majority of the jobs losses were experienced.

So, mindful that inflation is still occurring, the Fed is keeping interest rates steady so that current process of disinflation will continue. Meanwhile, 30-year mortgage interest rates appear to be cooling off their recent highs of 7.8 percent in October and are down to an average of 6.95 percent as of Dec. 14.

Looking forward, the Fed is projecting the Gross Domestic Product will slow down to 1.4 percent in 2024 before recovering 1.8 percent in 2025 and 1.9 percent in 2026. That’s pretty sluggish growth on the horizon.

Similarly, the Fed is still projecting that unemployment will rise from its current level of 3.7 percent to 4.1 percent in 2024, an implied 673,000 jobs that might be lost in the next year.

In that context, the Fed foresees that the Federal Funds Rate will begin to decrease from its current levels to 4.6 percent in 2024, to 3.6 percent in 2025 and to 2.9 percent in 2026. Rate cuts always come at the end of the cycle as the Fed attempts to foster conditions for more lending and easing liquidity.

Meaning, whatever the economic fallout of all the inflation — brought on the federal government, Congress and the Federal Reserve collectively spending, borrowing and printing almost $7 trillion for Covid — will be felt in 2024 as President Joe Biden faces reelection. That might be a consequence of the Fed waiting to begin hiking interest rates until after Russia invaded Ukraine in Feb. 2022, when inflation was already at 7.5 percent.

Instead, by waiting to act, the Fed managed to place the consequences of the inflation into the context of 2024, when the worst of it all might already be past us, or might have even been avoided altogether. Such that if Biden loses in 2024, one of the principal reasons might be because the Fed waited too long to hike rates. Whoops.

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Robert Romano is the Vice President of Public Policy at Americans for Limited Government Foundation.
Photo “Federal Reserve Building” by Rafael Saldaña. CC BY 2.0.




Reprinted with permission from

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