Jerome Powell’s Uncut Thunderbolt
Groucho Marx famously said: Don’t join his club. But what happens when a club joins you?
We have been discussing the following since early December: Economic growth was too strong to justify rate cuts In the first quarter of this year. The unemployment rate remained extremely low, and consumer spending was strong. Disinflationary forces in the first half of 2023 appear to be losing momentum in the second half, with continued progress and no certainty of returning inflation to the 2% target.
This has been a lonely watch for a long time, with markets almost certainly pricing in a rate cut at the March meeting. Even though the data coming in showed that the economy was not in a downturn and that inflation was actually rising slightly. The Wall Street “club” remained firm in its view that the Fed would cut interest rates.
That morning, Federal Open Market CommitteeIn its January announcement, market prices suggested a 60% chance of a March rate cut. In our view, this was evidence that the conviction of the story triumphed over the observation of the data.
Our expectation was that Fed Chairman Jerome Powell would likely send a message to the market in his press conference that the Fed was in no hurry to cut rates. There is no imminent recession or severe downturn in the labor market; The mission to re-establish price stability will rule. And that means it will take longer for the Fed to be confident that lower interest rates have weakened inflation enough to prevent it from reigniting.
lightning struck by Mariner S. Eccles Federal Reserve Building However, the noise on Wednesday was even louder than we expected. Instead of waiting to announce the news in a big way at a press conference, the Fed cleared the air with an official FOMC statement.
When considering adjustments to the target range for the federal funds rate, the Committee carefully evaluates future data, prospects, and the balance of risks. The Committee does not believe that it is appropriate to lower the target range until there is greater confidence that inflation is on a sustained path toward 2 percent.
This should be a clear enough message. The Fed hasn’t just said it doesn’t think it’s appropriate to raise rates now.I said it’s not so “I hope it’s appropriate.” future. The use of the future tense implied that the March cuts would be taken off the table.
There is always 30 minutes between the release of the Fed statement at 2:00 p.m. and the start of the Fed meeting. During this period, traders often push asset prices higher while anticipating how the Fed chair will explain the statement.
On Wednesday, a number of prominent analysts I was confident that the March reduction theory was still valid. And there was still a possibility of a rate cut in March. It would be inappropriate to name names, but perhaps some of them would have benefited from a break from TV shows and social media for a while.
Powell seemed to think his message was clear from the start of his news conference. But as the conversation with reporters progressed, it became increasingly clear that people were still clinging to the idea that the Fed might cut rates in March, and that something more needed to be said.
So Mr. Powell said:
In his response to me, Fed Chairman Jay Powell ruled out a March rate cut. #Powell: “Based on today’s meeting, I think it is unlikely that the committee will reach a level of confidence in identifying March as that period by the time of its March meeting.”
— Edward Lawrence (@EdwardLawrence) January 31, 2024
Interestingly, some are still clinging to the idea that the Fed could cut rates in March.We think of them as zombie march cutter (ZMC) They will continue to live as undead, and will likely remain so until the Fed doesn’t actually cut rates in March. Incredibly, the federal funds futures market still suggests a 38% chance of a March rate cut.
Still, the current consensus among analysts is that the Fed will not cut rates in March. So we are suddenly in the awkward position of joining the consensus. It feels a little uncomfortable and awkward. I don’t know if we like the club, and we’re not going to put a portrait of Chairman Powell on our wall.
Fortunately, No consensus yet What will happen after March?
A narrow gate for the Fed to cut interest rates
The question for Fed watchers is: When will the Fed cut interest rates?
But they should also consider the possibility that the Fed won’t cut rates at all this year.
There is Strong party caucus for May interest rate cut. “The Fed stayed the course. target rate “Interest rates are between 5.25% and 5.5% and may not be lowered until May.” wall street journal‘s Greg Yip wrote on Wednesday. Futures markets suggest a 95% chance of a May rate cut.
I think that’s unlikely. Only one inflation report and one employment report will be released between the session ending March 20 and the session ending May 1. At its May meeting, the Fed will submit its inflation report and report for January, February, and March, but not for April. If you know now that you won’t be ready for cuts in March; It would be strange to have it ready in just six weeks.
A June interest rate cut is more realistic. However, the Fed may decide to wait until July, a year since the last rate hike. Officials could rest assured they had nearly a year’s worth of data on how the economy responded to the pause in rate hikes.
If the Fed wants full-year data, it will have to wait until then. September meeting. The problem is that this country is holding a presidential election in September. Cutting interest rates at this point would expose the Fed to accusations of interfering in elections and politically manipulating interest rates.
At that point, you’ll probably choose the safer direction. It will be postponed until after Election Day. Here, the calendar favors the Fed, as Election Day is November 5th and the FOMC meeting is scheduled for the 6th and 7th (one day later than the usual Tuesday-Wednesday schedule). A rate cut the day after Election Day would be less politically explosive than one eight weeks ago.
There is quite a possibility that The Fed won’t be able to cut interest rates at all this year.. As we have been warning, there are many reasons to be concerned that inflation will accelerate. If that happens, the Fed could be taken off the table to cut interest rates by the end of the year.
Because we believe that there will be no reduction this year, We were once again alone in the wilderness. But that’s our preference.
