Fed Lowers Inflation Forecast For 2024, Seeing Core PCE Falling To 2.4%

• The Federal Reserve dialled back its inflation projections on Wednesday, seeing projected core Personal Consumption Expenditures (PCE) falling to 2.4% in 2024. The central bank also predicted that the core personal consumption expenditures price index will decline to 2.2% by 2025 and reach its 2.0% target in 2026.
• These new forecasts suggest a softer inflation picture in the next two years relative to September. Originally, the Fed had foreseen the core PCE hitting 2.6% in 2024 and 2.3% in 2025. While this may be so, in the post-meeting statement released last Wednesday, the Federal Open Market Committee said inflation has “eased over the past year” while maintaining its description of prices as “elevated.”
• While the public watches the consumer price index more closely as an inflation measure, the Fed prefers the core PCE reading. The former measure primarily looks at what goods and services cost, while the latter focuses on what people spend, adjusting for consumer behaviour when prices fluctuate. Core CPI was at 4.0% in November, while headline was at 3.1%.
• Committee members also upgraded their forecast for gross domestic product (GDP). GDP is now expected to grow at a 2.6% annualised pace in 2023, a half percentage point increase from the last update in September. Officials see GDP at 1.4% in 2024, roughly unchanged from the previous outlook. However, projections for the unemployment rate were largely unchanged, at 3.8% in 2023 and rising to 4.1% in subsequent years.
• Projections released by the Fed showed the central bank would slash rates to a median of 4.6% by the end of 2024, a three quarter-point reduction from the current targeted range between 5.25%-5.5%.

(Source: Reuters)