For the second meeting in a row, the Fed kept rates unchanged by a vote of 11-1. The fact that only Miran dissented is probably a sign of solidarity. The FOMC is circling the wagons.
What you care about
- the Fed still expects one cut this year and one cut next year
- The Fed believes inflation from oil is transitory temporary and will tolerate that for some time without hiking rates
- “If we don’t see inflation progress, you won’t see a rate cut.”
He also acknowledged that “some amount of oil prices will show up in Core PCE.” But it’s clear the Fed plans on treating it as transitory for the foreseeable future. “This energy shock is a one time thing.”
I obviously don’t believe the Fed should be considering rate hikes because of an oil shock, but I do think we have to be careful about using that as a get out of jail free card event after event.
Powell got a chuckle when he addressed the uncertainty oil is causing on forecasting, “If you were ever going to skip an SEP, it would be this one.”
Well, sure, but I didn’t get dressed up for nothing…
Fed Funds
Powell described the current level of rates as modestly restrictive/mildly restrictive/high end of neutral. The bar to cut rates is high, and is almost entirely dependent on the labor market.
Where do the projections suggest for the rest of this year?
No cuts: 7
One cut: 7
Two cuts: 2
Three cuts: 2
Four cuts: 1 (obviously Miran)
In 2027, one member actually sees a rate hike.
Jobs
While unemployment has held steady, job gains have remained low, “A good number of Committee members are concerned about low job creation.”
Powell suggested that 80k of the 92k jobs lost last month could be explained by weather, but the SF Fed research suggests a swing the opposite direction to -151k.
Inflation
This year, forecasts expect Core PCE up to 2.7% up from 2.5%. But next year barely moved, up to 2.2%. Again, this reinforces the Fed’s belief that oil shocks will be temporary.
In response to a question about near term inflation expectations rising, “We worry a lot about inflation expectations and we work hard to keep them well anchored” and pointed out that “the majority of inflation expectations are solid.”
You know what question makes him cranky? Whether we are at risk of stagflation. He noted that the term stagflation arose in the 1970s when unemployment was double digits and inflation was double digits. We aren’t remotely close to that. Stop calling today’s environment as stagflation. No quotations, but that’s what he said.
Other Note
This was supposed to be the 2nd to last meeting with Powell as Chair (AI suggested I say “penultimate”, but I figured you’d see right through that because that’s a fancy private school word), but no progress on his confirmation means Powell is likely Chair beyond May.
Powell said as much at the podium, referencing that the law will have him continue as Chair pro-tem. But he only said that because the White House has circulated an article that indicates the President decides who Fed Chair is…good times.
Will he serve out his remaining term once the next Fed Chair takes the helm? No comment.
Rate Reaction
Rates up across the board about 7-8bps. Market still has about one cut priced in this year, but a 42% chance of no cuts.
T2: 3.75% (+8bps)
T5: 3.87% (+8bps)
T10: 4.26% (+6bps)
For Those of You Enrolled at The JMo School of Inflation Hawks
