The Fed kept rates on hold for a seventh meeting Wednesday and tipped just one rate cut for 2024, a projection that already looked dated following an unexpectedly benign read on consumer prices.
Policymakers were blessed with a very favorable inflation update just hours ahead of the decision. Underlying consumer price growth was the coolest since August of 2021 in May, BLS data showed. Better still, a CPI-derived version of the “supercore” measure the Fed’s watching for evidence of services-sector disinflation fell on a month-to-month basis for the first time in years.
The White House was pleased. “[T]oday’s report shows welcome progress,” Joe Biden said, in a short statement, before reminding Americans that “wages are rising faster than prices, and unemployment has remained at or below 4% for the longest stretch in 50 years.” In other words: Vote for me! Things are better than you think. (Biden did acknowledge that “many families are feeling squeezed by the cost of living,” which he aptly described as “too high.”)
In the wake of the CPI release, rate-cut pricing for 2024 (which receded inside of 40bps following an overshoot on the headline NFP print last week), waxed to fully reflect two quarter-point reductions, a round-trip to pre-payrolls pricing. Wednesday’s closely-watched dot plot refresh, by contrast, reflected just one cut over the balance of the year. The “median” Fed official’s now more hawkish than the market.
A shift up in the median 2024 marker was, of course, a foregone conclusion. Forecasters were split on whether the refresh would tip two cuts or just one. The hawks apparently won the day, albeit just narrowly. The “two versus one” margin was very thin, which is to say the bar to put 50bps back on the table is low.
The 2025 marker shifted higher too, but now reflects 100bps of easing next year. Remarkably, the long run dot (the neutral marker) moved up 20bps, to 2.80%. That’s a notable development. R-star’s higher. Officials are coming around to it.
The new statement contained just one notable tweak. The Fed dropped the sentence alluding to the succession of CPI overshoots seen over the first three months of the year and replaced it with a reference to the last two months’ inflation releases: “In recent months, there has been modest further progress toward the Committee’s 2% inflation objective.”
The forward guidance was unchanged. The Fed doesn’t expect to cut rates until the Committee has “greater confidence that inflation is moving sustainably toward 2%.”
As for the macro projections in the SEP, the PCE and core PCE forecasts moved up 20bps for 2024 to 2.6% and 2.8%, respectively. The unemployment rate outlook was unchanged at 4% for this year, but moved up a tenth for 2025 to 4.2%. The longer run UNR projection moved up to 4.2% as well.
Between the tweak to the longer run UNR projection and the higher long run dot, the Fed’s guiding for higher rates and higher unemployment to balance the economy and keep prices stable. The upward shift in the neutral marker’s also a tacit admission that policy settings weren’t as restrictive as the Fed previously believed. The growth projections were all unchanged.
Frankly, this is pretty messy. You’ve got a dovish nod in the statement paired with a hawkish dot plot shift (relative to post-CPI market pricing), a higher neutral dot, marginally higher NAIRU and 100bps of easing penciled in for 2025. Surprisingly, Jerome Powell came across as calm and composed during a largely uneventful press conference.
This may sound cynical, but if the Fed wanted to put themselves in a position to present the punchbowl just in time for the election then they could not be doing a better job.
Out of curiosity, I clicked through a headline on this morning’s CPI report (it was on one of the XBC sites, I can’t remember which. N? MSN? CN? I wonder how many people remember that the MS stands for Microsoft? I digress). Anyway, it pointed out that surveys show a majority of Americans think we are in a recession.
This comment inspired by your third paragraph, which illustrates just how mystifying are the Democratic Party’s inability to perform basic messaging and marketing functions.
At this point, polls are basically just a partisan exercise, and when nearly half of the country is in thrall to the Trump personality cult, I don’t know that there is messaging that would change any minds. For those that say we’re in a recession but aren’t part of the cult, it’s likely their personal economic circumstances are such that we could just as well be in a recession.
I’m willing to bet much of the poor polling numbers for Biden and the economy is a function of Trump supporters registering their protests. They can say they don’t trust polling, but they’d gladly take any opportunity they can to register their disapproval and to make Biden look bad.
I expect Biden to eke out another win in November with even better performance by Democrats in the Senate and House. The biggest issue is that Democrats are clearly on the defensive in the Senate due to which seats are up for election in this cycle. Even then, I think it’s more likely that we’ll see a Democratic trifecta than a Republican one.
Good inflation report. The fomc should have been more positive. Time for qt to go completely. If they get another flat print they may actually want to cut rates sooner than forecast.