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The Story is Essentially the Same

March 20, 2024

Powell: “The story is really essentially the same, and that is of inflation coming down gradually on a sometimes bumpy path.  We’ve got 9 months of 2.5% inflation now and we’ve had two months of bumpy inflation.  The question is are they more than bumps?  We can’t know that and that’s why we are approaching this question carefully.”

Three rate cuts this year remained the same as January’s projections, but overall sentiment shifted higher.  In January, 5 members saw FF below 4.6% at year end.  Today, that’s just 1 member.  Next year’s FF shifted up 25bps and the longer run neutral rate also shifted up by 10bps.

Odds of a June cut jumped from 50% to 75%.

 

Main Takeaways

  • The Fed is largely looking past January and February’s inflation data…for now
  • They are committed to getting inflation to 2%, but achieving that “over time”
  • Powell spent a ton of time talking about the labor market and that an “unexpected” weakening could cause them to cut sooner or more than projected
    • This was my biggest surprise.  The fact that he repeatedly went out of his way to highlight risks in the labor market is something to monitor.
  • Tapering will begin soon

 

SEP Update - year end projections reflect an improving sentiment

  • Core PCE revised up from 2.4% to 2.6% (we’re at 2.8% now)
  • Unemployment rate revised down from 4.1% to 4.0% (we’re at 3.9% now)
  • GDP forecast revised up from 1.4% to 2.1%

What strikes me is that we are already on top of the Core PCE and UR projections.  It won’t take much to break past their levels.  If that happens, will the number of cuts increase?  In July, they projected year end Core PCE to be 3.9% and it came in at 2.9%.  

Rates are down a little bit across the curve, nothing dramatic.  

Powell even injected some humor when asked if he ever wished he didn’t have to do press conferences, “Of course…not.”

More detailed quotes from the press conference.  

 

With regards to January and February’s inflation reports coming in hotter than expected

“The January number was very high and there’s reason to think there could be seasonal effects there, but nonetheless we don’t want to be completely dismissive of it. The February number was higher than expectations but we have it currently well below 0.3% Core PCE which is not terribly high, so it’s not like the January number.  I take the two of them together and they haven’t really changed the overall story of inflation moving down gradually on a sometimes bumpy road toward 2%.  I don’t think that story has changed.  I also don’t think those readings added to anyone’s confidence that we’re moving closer to that point.  We didn’t excessively celebrate the good inflation readings in the last 7 months of last year…and we aren’t going to overreact to these two months’ of data.”

“The Committee’s looking at the two month’s of data and saying we’re just gonna have to see what the data show.  You can look at January’s very high reading and many people did see the possibility of seasonal adjustment problems there but, again, you gotta be careful about dismissing the parts of the data you don’t like.  February wasn’t as high.  We tend to see a little bit stronger data in the first half of the year and a little bit less strong later in the year. We don’t know whether if this is a bump in the road or something more.”

 

Labor

“If there were a significant weakening in the data, particularly in the labor market, that could also be a reason to begin the process of reducing rates.”  

Would strong hiring all by itself be a reason to hold off on rate cuts?  “No, not all by itself.  You saw last year’s very strong hiring and inflation coming down quickly.  We now have a better sense that a big part of that was supply side healing, particularly with the labor force.  In and of itself, strong job growth is not a reason for us to be concerned about inflation.”  

“We don’t see cracks in the labor market.  The overall picture is a strong labor market with the extreme imbalances in early parts of the recovery have mostly been resolved.  You’re seeing high job growth, big increases in supply, strong wage growth but wage growth is gradually moderating to more sustainable levels.  In many, many ways things are returning to the 2019 state, which we can think of as normal for this purpose. The labor market’s in good shape.  You do see things like the low hiring rate and people have made the argument that if layoffs were to increase, that could lead to fairly quick increases in unemployment and that’s something we’re watching but we’re not seeing it.” 

 

Financial Conditions

“We do think that financial conditions are weighing on economic activity and a great place you see that is in the labor market. You’ve seen demand cooling off a little bit from extremely high levels and there I would point to job openings quits, the hiring rate, things like that are really demand side things happening.”