For those who celebrate, happy FOMC day
The FOMC wrapped up their first meeting of 2024 yesterday (FOMC calendar here). Their statement outlined the decision to maintain the fed funds at its current rate.
“In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”
Bold is mine.
Following the statement, Jerome Powell held a press conference. His opening statement was well articulated. The real kicker was right near the end.
“As labor market tightness has eased and progress on inflation has continued, the risks to achieving our employment and inflation goals are moving into better balance. We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess the incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. We will continue to make our decisions meeting by meeting.”
The Fed members are still worried about a re-ignition of inflation coming back to bite them. The Fed’s been ‘Burn’-ed in the past with second and third wave inflation and they do not want a repeat. I am willing to go out on a limb here and say that they are going to be slow to cut.
Of course the majority of the press questions were spent drooling over when the cuts might come and what “greater confidence” might mean. The big bomb dropped midway through the press conference in Powell’s answer to a question from Fox Business’s Edward Lawrence about rate cuts.
Powell said, “Based on the meeting today, I would tell you that I don't think it's likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that [cut interest rates].”
I figured Powell’s guard had been worn down by the incessant rate cut questions and he let the cat out of the bag.
I think the more interesting discussion centered on productivity and supply chains.
Powell speaking, “And I think my own view is, I think if you look back to the pandemic, you saw a spike in productivity as workers were laid off and activity didn't decline as fast. And then you saw a deep trough of productivity. And then over the last -- you saw high productivity last year in '23. I think we're basically in the throes of getting through the pandemic economy. And the question will be, what is it that has changed the -- you know, the productivity tends to be based on, you know, fundamental aspects of our economy. Is there a case -- will it be the case that we come out of this more productive, more on a sustained basis? I don't know. What would it take? You know, people talk about AI, but my guess is that we may shake out and be back where we were, because I'm not sure I see -- work from home doesn't seem like it's a big productivity increase or AI, artificial intelligence, generative, maybe, but probably not in the short run, probably maybe in the longer run. So I'm not seeing why it would, but you know, right now I would say the productivity is kind of what falls out of the broader forces that are driving people in and out of the labor force and activity returning and supply chains getting fixed.”
I think the point the Fed Chairman was trying to make is that higher interest rates weren’t as restrictive as they could have been due to the normalization of supply chains and high worker productivity. Now that supply chains have stabilized we are seeing goods inflation at 0% y/y while service based inflation is holding up the average.
None of this seems to matter to the market which still believes we’ll see 6 rate cuts in 2024.
They’ve all moved on to the latest thing.
At some point, the mismatch between what the Fed is signalling and market expectations will matter but that day is not today.