Slowing inflation means the Federal Reserve will slow down its pace of interest rate increases that it implemented to slow the overheated economy. A little over a year ago, the narrative from policy makers was that inflation was “transitory” and nothing to be so concerned about. Then supply chain issues deteriorated, a war broke out in Eastern Europe, and labor supply became problematic. The investor community believes that we are within a half point to three quarters of a point of the peak in rates, and that peak may come within the next six months. The focus of the Fed is more on defeating inflation than maintaining a healthy short-term economy, so in our view, the Fed is less likely to blink and lower rates quickly when greater economic weakness is present.
That means rate increases will continue until the Fed believes that inflation has not only peaked. While spot rates pulled back aggressively over the summer, they seem to have leveled out by year-end and are exhibiting more regular seasonality. Contract rates were up by high single digits at the end of the third quarter but could be flat-to-negative when we see results from the fourth quarter. Fourth-quarter freight was underwhelming, largely as companies worked to correct too-large inventories. While spot rates pulled back aggressively over the summer, they seem to have leveled out by year-end and are exhibiting more regular seasonality. Contract rates were up by high single digits at the end of the third quarter but could be flat-to-negative when we see results from the fourth quarter. Contract rates will spend much of 2023 resetting downward (albeit less so).
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