Will they cut or won’t they? Fed committee meets in mid-December to decide fate of interest rates
Dec. 8, 2023
By Mary Hightower
U of Arkansas System Division of Agriculture
Dec. 8, 2023
Fast facts
- Fed to decide next interest rate action Dec. 12-13
- Loy: “Just keep an eye on the PCE”
(467 words)
(Newsrooms: With file art of Loy)
LITTLE ROCK — When it comes to making decisions on interest rates, the personal consumption expenditures index, or PCE, is something the Federal Reserve pays a great deal of attention, said Ryan Loy, extension economist for the University of Arkansas System Division of Agriculture.
The Federal Open Market Committee meets Dec. 12-13 to decide its next move on interest rates. Since March 2022, the committee has made 11 interest rate hikes, actions meant to pump the brakes on inflation.
The consensus is “it’s going to be almost guaranteed that they're not going to change it,” Loy said.
While some analysts are forecasting multiple rate cuts for 2024, that’s probably not going to happen, he said.
“If they let off the gas too early or start cutting it, then you're just going to get caught in this vicious cycle of having to raise them and drop them again and raise them and drop them again,” Loy said. The Fed is “just playing the long game and will likely drop the rates steadily over time.”
Looking at the CPE
While many are familiar with the Consumer Price Index, the PCE is a little different.
“The only difference between CPI and the PCE is how it’s calculated,” Loy said. The PCE, which also comes from the Bureau of Economic Analysis, “puts weight on certain different sectors of the economy than the Consumer Price Index.”
One example of the difference between the CPI and the PCE is how the Consumer Price Expenditure index looks at consumer behavior — specifically “substitutability.”
“It’s how consumers substitute goods,” he said. For example, when prices rise, the consumer who might normally buy a steak, might buy hamburger or other cheaper cuts instead.
“The Consumer Price Index doesn’t really take those substitutions into account,” he said.
To add another layer of detail, there are two versions of the PCE. One version includes the cost of housing and energy and the other does not.
“Housing and energy is very volatile, so they remove it, leaving you with the ‘core PCE’,” Loy said.
The core PCE rose 0.2 percent in October and is currently at 3.5 percent year over year, “but it’s not that huge a deal because personal income last month actually rose 0.2 percent, so consumers are keeping up with inflation,” Loy said. That’s in contrast to “the last two years we have not been keeping up with inflation,” he added. “All that is to say that we’re actually looking pretty good.”
Even as inflation slows, the threat of inflation isn’t gone.
In September, Goldman Sachs CEO David Solomon said it was his opinion that there was still a lot of uncertainty with the economy and thought that inflation could be “sticky,” persist into 2024 and cloud the prospects for interest rates to decline.
“Just keep an eye on the PCE,” Loy said.
To learn more, see the extension fact sheet, “How are Interest Rates Influenced?”
To learn about extension programs in Arkansas, contact your local Cooperative Extension Service agent or visit www.uaex.uada.edu. Follow us on X and Instagram at @AR_Extension. To learn more about Division of Agriculture research, visit the Arkansas Agricultural Experiment Station website: https://aaes.uada.edu. Follow on X at @ArkAgResearch. To learn more about the Division of Agriculture, visit https://uada.edu/. Follow us on X at @AgInArk.
About the Division of Agriculture
The University of Arkansas System Division of Agriculture’s mission is to strengthen agriculture, communities, and families by connecting trusted research to the adoption of best practices. Through the Agricultural Experiment Station and the Cooperative Extension Service, the Division of Agriculture conducts research and extension work within the nation’s historic land grant education system.
The Division of Agriculture is one of 20 entities within the University of Arkansas System. It has offices in all 75 counties in Arkansas and faculty on five system campuses.
The University of Arkansas System Division of Agriculture offers all its Extension and Research programs and services without regard to race, color, sex, gender identity, sexual orientation, national origin, religion, age, disability, marital or veteran status, genetic information, or any other legally protected status, and is an Affirmative Action/Equal Opportunity Employer.
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Media contact: Mary Hightower
mhightower@uada.edu