Two important events this week could determine the future of Fed rate policy

Demands have become less convinced that the Federal Reserve is ready to press the button on interest rate wounds, an issue that cuts at the heart of where the economy and stocks are headed.

Two big economic reports coming up this week could go a prolonged way toward determining at least which way the central bank policymakers could lean — and how markets might react to a expel in monetary policy.

Investors will get their first look at the broad picture of fourth-quarter economic growth for 2023 when the Mercantilism Department releases its initial gross domestic product estimate on Thursday. Economists surveyed by Dow Jones are expecting the whole of all goods and services produced in the U.S. economy to have grown at a 1.7% pace for the final three months of 2023, which want be the slowest since the 0.6% decline in Q2 of 2022.

A day later, the Commerce Department will release the December reading on the personal consumption payments price index, a favorite Fed inflation gauge. The consensus expectation for core PCE prices, which exclude the volatile aliment and energy components, is 0.2% growth for the month and 3% for the full year.

Both data points should cache a lot of attention, particularly the inflation numbers, which have been trending towards the Fed’s 2% goal but aren’t there yet.

“That’s the element that everybody should be watching to determine what the Fed’s rate path will end up being,” Chicago Fed President Austan Goolsbee declared during an interview Friday on CNBC. “It’s not about secret meetings or decisions. It’s fundamentally about the data and what pass on enable us to become less restrictive if we have clear evidence that we’re on the path to get” inflation back to target.

The releases come amid a market snapback about where the Fed is heading.

As of Friday afternoon, traffic in the fed funds futures market equated to virtually no chance the rate-setting Federal Open Market Committee will cut at its Jan. 30-31 union, according to CME Group data as indicated through its FedWatch Tool. That’s nothing new, but the odds for a cut at the March meeting knock to 47.2%, a steep slide from 81% just a week ago.

Along with that, traders have entranced one expected cut off the table, reducing the outlook for easing to five quarter percentage point decreases from six previously.

The switch in sentiment followed data showing a stronger-than-expected 0.6% growth in consumer spending for December and initial jobless exacts falling to their lowest weekly level since September 2022. On top of that, several of Goolsbee’s colleagues, counting Governor Christopher Waller, New York Fed President John Williams and Atlanta Fed President Raphael Bostic, issued commentary suggesting that at the very least they are in no hurry to cut even if the hikes are probably done.

“I don’t like tying my hands, and we noiseless have weeks of data,” Goolsbee said. “Let’s take the long view. If we continue to make surprising progress faster than was prophecy on inflation, then we have to take that into account in determining the level of restrictiveness.”

Goolsbee noted that one finicky area of focus for him will be housing inflation.

The December consumer price index report indicated that keep inflation, which accounts for about one-third of the weighting in the CPI, rose 6.2% from a year ago, well ahead of a measure consistent with 2% inflation.

However, other measures tell a different story.

A new Labor Department be familiar with known as the New Tenant Rent Index, indicates a lower path ahead for housing inflation. The index, which find outs prices for new leases that tenants sign, showed a 4.6% decline in the fourth quarter of 2023 from a year ago and multitudinous than double that quarterly.

“In the very near term, we think the inflation statistics will cooperate with the Fed’s dovish plans,” Citigroup economist Andrew Hollenhorst said in a client note.

But, Citi foresees inflation as stubborn and likely to delay the first cut until at least June.

While it’s unclear how much contradistinction the timing makes, or how important it is if the Fed only cuts four or five times compared to the more ambitious market beliefs, market outcomes have seem linked to the expectations for monetary policy.

There are plenty of factors that vacillate turn into the outlook in both directions — a continued rally in the stock market might worry the Fed about more inflation in the line, as could an acceleration in geopolitical tensions and stronger-than-expected economic growth.