The Fed kept rates on hold Wednesday. Obviously.
January’s gathering was a placeholder meeting as officials ponder when to commence what the December dot plot suggested will be a trio of so-called “insurance cuts” in 2024 — rate reductions for the purposes of managing risk.
The idea is to cut rates as inflation recedes in order to avoid passive tightening through the real-rate channel. So, “nothing to do with recession,” as Chris Waller put it in late November. Rather, rate cuts merely to keep policy settings stable in the context of inflation that’s expected to fall further over the course of the year.
Of course, inflation may not fall further, in which case those cuts might not be prudent. Recent data showed the US consumer is still spending and the advance read on Q4 GDP showed growth was robust as a result. In the new statement, the Fed described the economy in upbeat terms. “Recent indicators suggest that economic activity has been expanding at a solid pace,” the Committee said. That’s an upgrade from December, when activity had “slowed.”
The incoming inflation data is encouraging, if a bit uneven at times. Wage growth is cooling and that should help bring down services sector inflation throughout the course of 2024. For now, core inflation is still far too high, and that’s an argument for holding terminal as long as possible if you’re the Fed. The language around inflation was unchanged from December in the January statement: “Inflation has eased over the past year but remains elevated.”
The passage which referenced eventual, assumed drag on economic activity, hiring and inflation from tighter credit conditions (and, as of the November statement, tighter financial conditions too) was removed. In a new addition, the Fed said risks around the dual mandate are now “moving into better balance.” A perfunctory nod to macro uncertainty remained, as did the contention that the Fed’s “highly attentive” to inflation risks.
The Committee also removed a sentence which affirmed the strength and resilience of the US banking system, almost surely because policymakers assumed it goes without saying 10 months on from the regional banking crisis. That omission seems ironic already in light of what happened to New York Community Bancorp on Wednesday.
The forward guidance, while implicitly (and for the first time this cycle) acknowledging that rate cuts are possible, pushed back emphatically (but tacitly) against a March reduction. “In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” the statement read. “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Again, everything’s implicit/tacit there. “Any adjustments” could mean cuts as well as hikes. “[U]ntil it has gained greater confidence” doesn’t by definition rule out March — policymakers could conceivably gain that confidence between now and then — but it suggests a cut at the next meeting is unlikely. Obfuscation aside, the message was pretty clear: Yes, cuts are coming. No, probably not in March.
The Committee surely commenced discussions this week around when to begin tapering balance sheet runoff. The timeline and parameters are expected to be unveiled over the next several meetings. January was always going to be too early for specifics, but the Fed appeared keen to suggest a taper is still a ways off — or at least that there’s nothing worth sharing right now. The language around the balance sheet was unchanged: “The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
With no new projections or dots to squint at, traders quickly turned to Jerome Powell’s press conference.
I missed some of the presser but did catch Powell saying or inferring (my paraphrases)
– don’t know what R* is, some estimates are much higher than others
– don’t need or want slower growth or weaker labor market
– six months of good inflation data not enough, want to see more to be confident inflation is done
– anecdotals suggest economy is accelerating
– expect goods deflation to end
– rate cuts starting in March are unlikely, not the base case
My growing feeling is the FOMC may be thinking services inflation is still too high, economy is doing just fine at current rates, why should we rush to cut?
I previously thought that Fed would want to get rate cuts done well before the election. I no longer have any confidence in that.
Look forward to seeing the synopsis from someone who did watch the whole presser.
Historically speaking, rates at this level are not that high, and an economy as large and diverse as ours should be able to handle them. Of course, there’s a lot of debt out there, and debtors will push back against my claim. But I’m of the mind that Chair Powell thinks the U.S. economy would be better off with less debt and that one way to achieve that is to flush some of the egregiously bad debt out with higher-for-longer rates. Bad banks, bad derivatives, unproductive speculation propping up unsustainble asset valuations — better to flush it out now, before it reaches China proportions, no?