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The Next Fed Move Will Be a Cut

Punchline first - the formal FOMC statement eliminated the phrase, “the Committee anticipates that some additional policy firming may be appropriate.”   That’s a huge deal.


On Rate Hikes

Q: Should we read this as a pause?

A: “A decision on a pause was not made today.”  Powell then went on to note that the aforementioned change to the formal statement was a meaningful one.  He also went on to point out how today’s hike now matches the Fed’s own forecast for where rates will end the year.  That’s a lot of things pointing to a pause.  

Q: Did the possibility of a pause come up?

A: “Support for the 25bps was very strong across the board.  I would say there were a number of people that did talk about pausing, but not so much at this meeting.  There’s a sense that we are much closer to the end than the beginning.  When you add up all the tightening across all the channels we are almost done.”

Q: Should we expect rate cuts by year end?

A: “We, on the committee, have a view that inflation is going to come down, but not so quickly.  If that forecast is right, it will not be appropriate to cut rates.  So that’s not our forecast.”

Q: Is 5%-5.25% sufficiently restrictive from your viewpoint?

A: “That will be an ongoing assessment. It’s not possible to say that with confidence right now.”  He went on to add that sufficiently restrictive levels are “not far off, we are possibly at sufficiently restrictive levels already.”  

Q: Is the bar higher to raise rates?

A: “I couldn’t really say.  I think we’ve moved a long way fairly quickly and we can afford to look at the data and make a careful assessment.”


On Banking

In his opening remarks, he noted, “The banking system is sound and resilient”.  Conveniently, he didn’t mention that 3 of the 4 biggest bank failures ever have occurred in the last two months.  

Powell also went on to say, “bank conditions have broadly improved since early March”, while also failing to mention the $350B+ in emergency loans were made to banks during that window.  Pensford’s conditions would broadly improve with $350B, too.

He did stress that, “A particular focus going forward is what’s happening with credit tightening and what effect is that having on lending.”

We don’t get the next Senior Loan Officer Survey until Monday, but Powell gave a sneak preview when asked about it, “The Senior Loan Survey is consistent with other data.”  Powell has seen that report and he read a scripted response to a question about it.  That tells me that Monday’s report is going to be brutal.  

On Inflation

“The process of getting inflation down has a long way to go, while longer term inflation expectations seem well anchored.”

“We are prepared to do more if greater monetary policy restraint is warranted,” Powell said.

Unfortunately, he started the press conference off with, “the economy has slowed considerably.”  I’m glad he acknowledged that, because over the last five quarters GDP has grown just 0.9%.

Stubborn Inflation + < 1% GDP = Stagflation

Powell noted that “Real rates are 2%, which are meaningfully above what most people would consider restrictive.  Policy is tight.”  This is important because we’ve been assuming he wanted real rates around 1.50%, so if he believes they are already at 2%, it increases the odds the Fed is done hiking.  

On Regrets

Q: Do you have any regrets?

A: I have a few.  

You and me both, Jay.  

Market Reaction

Rates are down across the curve.  This should be good for caps, but keep in mind we get several more inflation reports before the next meeting.  

Speaking of which, current odds of a hike on June 14th are just 16%.  

The September 20th meeting has a 75% probability of a cut.

Markets have just a 0.2% probability of no cuts this year.  

Markets have SOFR at 4.38% at y/e 2023, and 3.08% at y/e 2024.

Looking forward, there is a greater disagreement in the path of Fed Funds than the ultimate landing spot.  Y/E 2024 shows a disparity between the market and the Fed of 1.40%, which narrows to 0.40% y/e 2025.

Jobs report on Friday.  Senior Loan Officer Survey on Monday.  Buckle up.