End of Year & Hiking Cycle

January 2024 Economic Review

After implementing one of the most aggressive interest rate-tightening cycles in decades over the last two years, central bankers across the globe are poised to begin an easing of monetary policy as inflation continues to decline. The Federal Reserve highlighted this change with its release of the dot plot in December. The dot plot illustrates where policymakers estimate interest rates will be at the end of the next several years and over the long run. Each dot represents every committee member’s estimate, and the median forecast is evaluated by market participants for future policy direction. The December release showed policymakers anticipate cutting interest rates much sooner than previously forecasted and signaled 75 basis points of cuts for 2024 as the base case. The Fed funds futures market believes the Federal Reserve may be more aggressive in cutting rates than the dot plot has forecasted due to declining growth forecasts.

Ultimately, this rate-cutting philosophy hinges on inflation continuing to slow. The Core Personal Consumption Expenditure (PCE) Price Index, which strips out more volatile food and energy components, moved lower to 3.2% in November from the previous 3.5% October level. Although the figure (in this case PCE representing inflation) is still well above the Federal Reserve’s target of 2.00%, the recent trend has been supportive of returning to near these levels. On a six-month annualized basis, the core metric rose 1.9%, the first time in three years that this has been below the Fed’s long-term target.

With inflation normalizing and allowing the Federal Reserve to halt the current hiking cycle and pivot toward an easing policy stance, we have noticed longer-term interest rates lowering accordingly. While the likelihood of an economic soft landing remains low, the key ingredients remain present with strong employment and policymakers willing to reverse course quickly. The recent increase in consumer spending, despite higher borrowing costs, shows just how resilient the extremely important consumer has been and why the soft-landing probability has increased.

Current Economic Releases
Data Period Value
GDP QoQ Q3 ’23 4.90%
US Unemployment Dec ’23 3.70%
ISM Manufacturing Dec ’23 47.4
PPI YoY Nov ’23 0.90%
CPI YoY Nov ’23 3.10%
Fed Funds Target Jan 10, 2024 5.25% – 5.50%
Treasury Yields
Maturity 1/10/24 12/11/23 CHANGE
3-Month 5.338% 5.189% 0.199%
6-Month 5.234% 5.391% 0.157%
1-Year 4.813% 5.117% -0.304%
2-Year 4.360% 4.708% -0.348%
3-Year 4.106% 4.457% -0.351%
5-Year 3.972% 4.246% -0.274%
10-Year 4.023% 4.233% -0.211%
30-Year 4.196% 4.327% -0.131%
Agency Yields 
Maturity 1/10/24 12/11/23 CHANGE
3-Month 5.421% 5.500% -0.079%
6-Month 5.302% 5.410% -0.108%
1-Year 4.963% 5.173% -0.210%
2-Year 4.359% 4.814% -0.455%
3-Year 4.447% 4.803% -0.356%
5-Year 3.895% 4.397% -0.502%
Commercial Paper (A1/P1)  
Maturity 1/10/24 12/11/23 CHANGE
1-Month 5.320% 5.360% -0.040%
3-Month 5.440% 5.490% -0.050%
6-Month 5.380% 5.500% -0.120%
9-Month 5.280% 5.430% -0.150%

Source: Bloomberg. Data as of January 10, 2024. Data unaudited. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments. Investment involves risk including the possible loss of principal. No assurance can be given that the performance objectives of a given strategy will be achieved. All comments and discussions presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.