THE FED
As expected, the Fed cut rates by 25 basis points this week, bringing the federal funds rate to a range of 4.25%-4.50%. The move was not surprising and there was little change in the Fed’s post-meeting statement. Less anticipated were the bigger changes within the Summary of Economic Projections (SEP). The new dot plot reveals the Fed expects only two rate cuts in 2025, down from the four cuts projected in the September SEP. Also, there is greater dispersion within the rate projections for 2026-2027, implying more uncertainty with the path forward. Significantly, the inflation outlook for 2025 increased with the Personal Consumption Expenditures (PCE) forecast rising to 2.5% from the previously projected 2.1%. Projections for the unemployment rate were relatively unchanged.
Our Take: The Fed cut rates as expected but, with a more stable labor market and inflation remaining stubbornly above target, it is clearly signaling fewer rate cuts as we move into 2025.
INFLATION AND RETAIL SALES
The core PCE Index, the Fed’s preferred measure of inflation, rose 0.1% in November and is up 2.8% over the last twelve months. Retail sales rose 0.7% in November.
Our Take: The core PCE measures were slightly lower than expected but also indicate that movement toward the Fed’s 2% target has stalled. The lack of progress on inflation was likely a source of discussion and dissent regarding the rate cut decision. Real retail sales, which account for inflation, have been relatively flat but the consumer appears to remain on solid footing. As mentioned above, a strong economy coupled with stubborn inflation should make future rate cuts less likely.
BRAZIL
Brazilian assets and the real came under pressure after the Brazilian congress watered down spending cuts in the budget bill that aimed to address the country’s large budget deficits. Central bank efforts to support the currency were only temporarily effective.
Our Take: Brazil is proving unable to address the rampant deficit spending that the current left-leaning government has been running. Investors are shunning Brazilian assets in response. Brazil seems to have found the point where fiscal unsustainability is disciplined by a capital markets response.
MUNICIPALS
The Chicago City Council approved a $17.1 billion budget for 2025. The budget does not include a property tax increase, which appeared in Mayor Brandon Johnson’s earlier budget proposals. Mayor Johnson originally had asked for a $300 million tax hike followed by a $150 million increase and finally a $68.5 million increase. All three property tax increase proposals were rejected by the aldermen. In lieu of the property tax increase, $181 million in new fees and taxes will take effect as part of the new budget. In addition to the fees and taxes, some spending cuts were included in the budget.
Our Take: Mayor Johnson had promised not to raise property taxes during his campaign but was faced with a budget gap and needed to find additional revenue to avoid cuts to essential services and personnel. Even though residents will avoid a property tax hike, the new or increased fees and taxes on plastic bags, ride-hailing services, cloud storage, streaming services, parking and valet services will affect many Chicago residents.
HAPPY HOLIDAYS
The Week in Review will pause until January 10.
Our Take: We wish everyone a wonderful holiday season and a Happy New Year!