This week, two main topics are dominating the discussions among markets and economists.
A March Interest Rate Cut in Question
The focus is on whether Federal Reserve officials will dampen market expectations for a potential interest rate cut in March. As the Federal Reserve enters a media blackout period starting this Friday before their next policy meeting, investors are optimistic about a rate cut. However, some Fed officials have expressed skepticism about this expectation, leading to uncertainty.
Consumer Spending Outlook
Another key concern among economists is the latest data on consumer spending. Despite worries about rising debt levels, consumers have displayed resilience over the past year. However, a recent study by the Philadelphia Fed discovered that credit card delinquency rates have surpassed pre-pandemic levels in the third quarter. Therefore, the upcoming data will shed light on the state of consumer spending during the recent holiday season.
Fed Gov. Waller’s Optimistic View
Fed Gov. Christopher Waller made headlines in late November when he suggested the possibility of an interest rate cut in the spring. Waller stated that if inflation continues to decrease consistently for an extended period, the policy rate can be lowered accordingly. His comments led to a rally in stocks and a decline in 10-year Treasury yields, as the market began foreseeing potential rate cuts starting from March.
The Markets Await Waller’s Remarks
The markets are eagerly anticipating the remarks of Fed Governor Christopher Waller. There is some concern that Waller may dismiss the possibility of a rate cut in March. Since the last Fed meeting, officials have remained noncommittal about the timing of potential cuts, with some pushback against a rate reduction in March. Economist Jeremy Schwartz from Nomura warns that Waller’s remarks will carry significant weight in shaping market expectations.
December Retail Sales
Wednesday, 8:30 a.m. Eastern
Despite concerns about the state of consumer health, the holiday spirit prevailed in 2023. Economists predict a solid 0.4% increase in retail sales for December, following a 0.3% gain in the previous month. This expected gain aligns with market expectations and would indicate sustained momentum in the economy. However, a weaker performance might bolster the case for a Federal Reserve rate cut in March.
Fed’s Beige Book Report
Wednesday, 2:00 p.m. Eastern
The Beige Book offers valuable insights into the current state of the economy through anecdotal reports from business contacts across the 12 Fed district banks. Amidst the considerable uncertainty surrounding the economy’s trajectory this year, Fed officials have emphasized the importance of these first-hand accounts.
In the most recent report from November, a downgraded outlook revealed that economic activity had slowed, with six districts reporting slight declines. However, there is hope that a recent decline in long-term interest rates since November could potentially energize business sentiment in December.