If a picture can be worth a thousand words, here are three thousand worth on where the economy stands now. First, inflation using the Personal Consumption Expenditures measure, which is the Federal Reserve’s preferred measure when making decisions:
Next, economic growth via gross national product, or GDP:
Finally, the unemployment rate:
Put succinctly: Inflation is down, the economy is growing, and unemployment is low.
This seems like the so-called soft landing, where the economy comes under control without a recession. All’s well for the end of the year.
Except that may not be the case given the most recent economic projections from the Fed.
On December 18, 2024, the Federal Open Market Committee, the part of the central bank that sets benchmark short-term interest rates, said it was reducing that federal funds rate by a quarter point (also known as 25 basis points, where there are 100 basis points in 1 percentage point).
Markets expected exactly that action. What they might not have expected is the set of projections they published, as the table below shows.
What the numbers show is a concern of the Fed that inflation will start to turn up again and not continue down on the trend that ended when price increases started to turn up in September 2024. The best way to understand this is to compare the organization’s projections from September and December to see how much the combination of data they look at has affected their views.
The Fed’s projections are an overview of the individual estimates that Fed officials make. Now for some necessary jargon. A median forecast is the exact middle of the ranges the individual Fed officials turn in. The central tendency is a set of numbers giving a fuller view of how widely those individual projections spread apart. Then the range is the low to high of the individual projections. PCE inflation is the measure of inflation from the U.S. Bureau of Economic Analysis’s Personal Consumption Expenditures. Core PCE inflation is inflation without changes in energy and food because both spending categories can be volatile and exaggerate monthly changes, leading to inaccurate views on longer-term developments.
In September, the median projection of PCE inflation was 2.3% in 2024, 2.1% in 2025, and 2.0% in 2026 and 2027. For Core CPE inflation, the median was 2.6% in 2024, 2.2% in 2025, and 2.0% in both 2026 and 2027.
In December, however, the median projections of PCE inflation were 2.4% in 2024, 2.5% in 2025, 2.1% in 2026, and 2.0% in 2027.
The central tendency for CPE inflation in September was 2.2% to 2.4% in 2024; 2.1% to 2.2% in 2025; and 2.0% in 2026 and 2027. But the central tendency from December was 2.4% to 2.5% in 2024; 2.3% to 2.6% in 2025; 2.0% to 2.2% in 2026; and 2.0% in 2027.
For core inflation, the September central tendency was 2.6% to 2.7% for 2024; 2.1% to 2.3% in 2025; and then 2.0% in 2026 and 2027. But in December, 2024 was 2.8% to 2.9%; 2025 was 2.5% to 2.7%; 2026 was 2.0% to 2.3%; and 2027 was down to the Fed’s target of 2.0%.
The ranges are more extensive versions of the central tendencies and are listed in the chart so you can see how far apart the guesses are.
All this will have real impacts next year. Look at the last line of figures — the federal funds rate. In September, the projection was for 4.4% in 2024, 3.4% in 2025, and 2.9% in 2026 and 2027. The December projections were 4.4% for 2024, 2.9% in 2025, 3.4% in 2026, and 3.1% in 2027. If they prove to be right, the federal funds rate will be 0.5 percentage points higher than was expected in September. That means higher interest rates for cars, credit cards, and other revolving credit for consumers. More expensive credit for businesses. And yields on the 10-year Treasury instruments will go up, making new or adjustable mortgages more expensive.
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