WASHINGTON – Strong economic performance, including solid retail sales growth, signals a good likelihood that the Federal Reserve board will cut interest rates this year, Federal Reserve Board Governor Christopher Waller said Tuesday.
In the fourth quarter of 2023, real GDP grew around 2% and unemployment stayed below 4%.
“For a macroeconomist, this is almost as good as it gets,” Waller said during an event hosted by the Brookings Institution, a respected policy research organization.
He indicated that he would closely examine the December retail sales report, which was released Wednesday. It showed a monthly gain of 0.6%, much higher than the November increase of 0.3%.
In October during another speaking event, Waller cautioned that the economy would need to cool through slower economic growth and employment, or inflation would begin to stagnate or even rise again. The fourth quarter of 2023 indeed saw a slowdown, with much lower growth in business investment and government spending, and more tentative slowing of consumer spending, Waller said.
Now, three months later, he is more confident the economy will continue along its current trajectory, maintaining low inflation alongside moderate economic growth and an improved balance between job vacancies and unemployed people.
The retail sales report is another good sign. Waller pointed to depletion of excess savings and increased credit card usage among consumers as potential indications of a spending slowdown, but sales in December exceeded economists’ expectations.
Waller did not specify how much the Federal Open Market Committee would cut its benchmark rate: the overnight borrowing rate for banks. That rate is used as a tool to set all other rates like consumer loans and savings rates, and currently stands at a range of 5.25% to 5.5%. But last month, the FOMC indicated that at least three rate cuts could take place in 2024.
Many consumers are still feeling the pinch of high prices, but they are also seeing higher incomes, said Joanne Hsu, director of the University of Michigan Surveys of Consumers, which publishes the Index of Consumer Sentiment that measures people’s feelings about the economy. Most respondents said they expect to see income growth in the year ahead, she said in an interview.
The last measure of the index for December showed that consumers are feeling more positive about the economy. The 14% increase in December reversed a downward trend in consumer sentiment from the past four months.
Inflation is consumers’ top concern, and respondents had far more positive long-term expectations for inflation in December than in November, Hsu said.
“Earlier in 2023, consumers absolutely noticed that inflation was continuing to slow down. The problem was they weren’t really sure that that inflation slowdown was gonna stick,” Hsu said. “I think people were paying really close attention to prices in December, with the holiday season and holiday travel. And I think what they were saying was that, yes, prices still remain high, but it was many consecutive months of slowing inflation.”
The White House and many journalists have dubbed 2023’s economy a “miracle,” bringing inflation back under control since its peak around 9% in June 2022, the highest rate since the 1980s. Simultaneously, the year saw high economic growth, more than 2.5 million jobs added and record-high household wealth. Economists increasingly see a “soft landing” on the horizon, slowing the economy to control inflation while avoiding a recession.
However, Waller also said the Fed should not rush to cut interest rates. Inflation has fallen significantly in 2023, but largely from easing of supply chain issues, which may obscure the effects of consumer demand, he said.
“People have been talking a lot about, ‘oh, all the last six months shows this was all supply, all supply, all supply.’ Well, if these are temporary supply shocks, when they unwind, the price level should go back down to where it was. It’s not,” Waller said. “The level of prices is permanently higher.”
When the supply-side effects fade, consumer demand will need to fall to keep inflation on its current downward path. Otherwise, inflation may rebound. Waller said he will take a close look at the January Consumer Price Index report and revisions for 2023, coming in mid-February, to see if the positive picture on inflation changes.
Craig Austin, assistant teaching professor of logistics and supply chain management at Florida International University, believes the supply chain — rather than demand — is behind the increased price levels, even though effects from the pandemic have faded.
“There’s always disruption,” Austin said in an interview, citing uncontrollable shipping disturbances such as El Niño and attacks in the Red Sea. “I think demand is good, but it’s not what’s driving the prices. It’s really going to be supply chain issues.”
Austin believes low demand and greater supply chain efficiencies will continue to bring down inflation in 2024, possibly even to the point of a recession.
Waller is more confident, based on December figures, that the economy can continue along its current trajectory of a soft landing. But the Fed will not begin moving until they are convinced inflation is near target, he told the audience at Brookings.
“The key thing is the economy’s doing well. It’s giving us the flexibility to move carefully and methodically,” Waller said. “The worst thing you’d have is, it all reverses and we’ve already started to cut.”
