Inflation Likely at or Past Its Peak Heading Into 2024

Ron Feldman, first vice president and chief operating officer at the Federal Reserve Bank of Minneapolis, headlines Midwest Economic Forecast Forum

By Cassandra Krause, Wisconsin Bankers Association

Ron Feldman, first vice president and chief operating officer at the Federal Reserve Bank of Minneapolis

“We’re in a really, really different spot than we were just nine months ago,” emphasized Ron Feldman, first vice president and chief operating officer at the Federal Reserve Bank of Minneapolis as he kicked off the Midwest Economic Forecast Forum. The virtual event — broadcasted on January 11, 2024 — was presented by the Wisconsin Bankers Association in partnership with the Illinois Bankers Association, the Michigan Bankers Association, the Minnesota Bankers Association, the South Dakota Bankers Association, and the Wisconsin Bankers Foundation. The event was sponsored by Banconomics, BOK Financial Capital Markets, and Wipfli LLP.

Fed 101

Feldman underscored the dual mandate of the Federal Reserve System: stable prices (a target of 2% inflation) and maximum employment. Those two goals have historically been viewed as being in tension with one another, but that has not been the case recently as inflation has come down without a big hit to unemployment. He noted that the big, key-picture economic ideas give a very good indication of how the Fed operates and what it is trying to achieve, and the Fed is data-driven in its approach to monetary policy.

Diving Into the Data

When looking at current data relative to March 2023, the labor market remains strong, while Gross Domestic Product (GDP) has increased, and inflation has decreased. The current overall unemployment rate sits at 3.7%, and Feldman pointed out that although the Black unemployment rate is at 5.2%, the gap has shrunk. The current labor force participation rate is holding steady at 62.5%. These indications correspond with what Fed officials have heard from their business contacts: that the labor market is not as tight as it was a year ago, but it is not described as loose. When comparing job openings to the number of people seeking jobs, there is more of a balance.

As of November 2023, the personal consumption expenditures (PCE) price index was at 2.6% (compared to 2.9% in October 2023). Feldman noted that PCE is a good measure to predict the future, along with core PCE (excluding food and energy). The core PCE also decreased from 3.4% in October 2023 to 3.2% in November 2023.

December 2023 data released the day of the Midwest Economic Forecast Forum showed a slight increase (+0.3%) in the Consumer Price Index (CPI) to 3.4%. Core CPI came down (-0.1%) to 3.9% in December 2023. These metrics show the same general trend of substantial declines from the peaks, however they remain at a high level.

The year 2022 saw 425 basis points of interest rate increases, followed by 100 basis points of increases in 2023 (with the Federal Open Market Committee (FOMC) keeping the rate constant in their last three meetings of the year in September, October, and December). Feldman says no one is using the language lightly, however the idea of a “soft landing” — getting inflation to come down without having an associated recession — is “at least the path we have been on to date.”

What to Watch

Feldman encouraged Midwest Economic Forecast Forum attendees to look to sources such as FOMC statements, press conference statements from Federal Reserve Chair Jerome Powell, FOMC notes and meeting minutes, and the quarterly Summary of Economic Projections (SEP) for information on Fed policy. Feldman cited the following excerpt from the December 13, 2023 FOMC statement:

The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.

A detail noted by Feldman was the use of the word “any” in “any additional policy firming,” which signals the possibility that the Committee does not foresee additional rate increases. While rate increases are not off the table, the use of the word “any” could be interpreted as an acknowledgement that the economy is likely at or near the end of peak inflation.

With its focus on the dual mandate, the Fed has its economists watching every sector of the economy. As work-from-home trends evolve, a current area of particular concern mentioned by Feldman was commercial real estate in urban areas. He also mentioned a tight labor market in the agricultural sector as an area to watch.

The 2% Goal and When Interest Rates Will Decrease

During the Q&A, Feldman was asked about the rationale to continue using 2% as the target metric for inflation. He replied that the last thing a central bank that wants to be viewed as credible would do is to change the inflation target when it is high. He equated it to “moving the goal post during the middle of the game” and said he does not believe the conversation surrounding the 2% target will be a focal point until inflation is where it’s supposed to be. In other words: it is a conversation for another day.

In response to the question of when interest rates will come down, Feldman said he expects the FOMC to be looking at current readings on inflation, recognizing that there is a large lag from rate increases already put into the system. The Committee may not necessarily wait until inflation hits 2% to begin easing policy; trends are guiding decisions, and policy is not solely determined by hitting certain metrics. When asked about market predictions versus what the Fed is signaling, Feldman said markets can have a different forecast or different reaction to economic data. Throughout the discussion, Feldman emphasized that the Fed stays focused on its dual mandate and what is good for the public; while it is aware of what is going on, it does not base its policy based on market predictions or the presidential election.

There is no pre-set sense of when rates will come down, but if things continue to trend in the same direction, a reversal in monetary policy is very possible in 2024.

The recording of the Midwest Economic Forecast Forum is available to registrants through January 25, 2024. WBA members who did not register for the live event may contact wbaeducation@wisbank.com to register and receive the recording.

Wisconsin Experts Offer Sector Forecasts

As an extension of the Midwest Economic Forecast Forum, WBA has compiled eight sector-specific reports from industry experts on what 2024 will hold for Wisconsin. The reports include insights from Rose Oswald Poels, Wisconsin Bankers Association; Robb Kahl, Construction Business Group; Kevin Krentz, Wisconsin Farm Bureau Federation; Brandon Scholz, Wisconsin Grocers Association; Eric Borgerding, Wisconsin Hospital Association; Kurt Bauer, Wisconsin Manufacturers & Commerce; Tom Larson, Wisconsin Realtors Association; and Tom Still, Wisconsin Technology Council.