What's At Stake With The Upcoming Fed Meeting?

Over the past 2 months, speculation ramped up quickly regarding the pace and magnitude of Fed rate cuts in 2024. Next week brings the first Fed meeting that's in the realm of that speculation. Some pundits went so far as to mention a chance of a rate cut as early as the January meeting.  Could that happen and what would the implications be of rate cuts in general? First off, the market doesn't really believe this will happen.  There were a few days where some of the trades in Fed Funds Futures suggested an outside possibility of a January rate cut, but that has since been priced out of the market. There has certainly been a shift in the market's assessment of the Fed's stance.  It took place with strong momentum in November and December. The Fed itself added to the momentum with the rate-friendly announcement on December 13th. Since then, however, we have not seen the sort of economic data necessary to fulfill the conditions of a Fed rate cut cycle.  This isn't to say it can't happen in 2024--only that it's too soon to debate.  At the very least, we know we haven't met those conditions yet. But what about core inflation returning to 2%?  After all, that's the Fed target and this week's GDP data did show core PCE at 2% quarter-over-quarter. This is not an optical illusion, but it's important to understand the 2% inflation target is an annual metric.  The chart above shows lots of promise based on Q4 of 2023.  Now we need to make sure 2% inflation sticks around so the annual chart can align with the quarterly chart.