– PCE In Line with Expectation but Want More, Better Inflation Data
– FOMC Won’t Cut Rates Until ‘Confident’ Inflation ‘Sustainably” Headed to 2%
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell said nothing that could be interpreted as encouraging hopes for early interest rate cuts in a series of major remarks Friday.
Powell repeated that “unexpected labor market weakness” could trigger a monetary policy “response,” but said that’s not what he and his fellow policy makers anticipate. He made the comment during a moderated discussion at the Federal Reserve Bank of San Francisco’s annual macroeconomic and policy conference.
He made clear the Fed is in no rush to cut rates and said the strength of the economy and labor markets gives them the luxury of waiting until they’re “confident” that inflation is “sustainably” headed down to 2%.
Powell’s remarks followed a Commerce Department report that the Fed’s preferred inflation gauge, the price index for personal consumption expenditures (PCE) rose a more moderate 0.3% in February. But the index was up 2.5% from a year earlier, a tenth more than in January. The core PCE rose 0.3% following an upwardly revised 0.5% January gain and was up 2.8% year-over-year – a tenth less than in January. The agency also reported an 0.8% personal spending surge.
The Fed chief said the February PCE data were “pretty much in line with our expectations” and said “it’s good to see something coming in line with our expectations …..”
However, he said the Fed is not going to “overreact” to the January and February inflation data, any more than it did to more favorable inflation statistics in the second half of 2023.
““Last year, we got definitely good data over the course of seven months, then in January we got a much higher reading on inflation …,” he recalled. “February was lower but not as low as the good readings we got last year … but more in line with what we want to see …..”
However, the Fed needs to see further evidence of disinflation, he stressed again and again.
“We want to be more confident before we take that step …,” he said, adding, “monetary policy is well-placed to react to different paths of data ….”
Markets had a surprisingly dovish interpretation of Powell’s comments last Wednesday, when he spoke to reporters after the Fed’s rate-setting Federal Open Market Committee left monetary policy unchanged and reiterated projections for three 2024 rate cuts.
Because FOMC participants did not trim back the rate projections for this year, despite worse than expected inflation and despite forecasts that inflation will remain well above the 2% target this year, financial markets rallied strongly on the presumption that the Fed would be cutting rates as early as June.
Markets downplayed the fact that Fed officials reduced the number of projected rate cuts over the next two years, as well as Powell’s cautionary comments in his post-FOMC press conference. For instance, Powell said, “The economic outlook is uncertain, however, and we remain highly attentive to inflation risks. We are prepared to maintain the current target range for longer if appropriate.”
“We know that reducing policy restraint too soon or too much could result in a reversal in the progress we’ve seen in inflation and require tighter policy to get inflation back to 2%,” the Fed chief also said. “The committee does not expect it will be appropriate to reduce the target range until it has gained confidence that inflation is moving sustainably down towards 2%.”
“What we’re looking for is confirmation that that progress (against inflation in the second half of 2023) will continue,” Powell added.
Powell’s latest comments, along with those of other Fed officials, seem designed to reset Fed communications a bit and correct market misimpressions of a central bank eager to get on with cutting rates.
Reacting to Friday morning’s PCE report, he said, “it’s not appropriate to lower interest rates until we’re confident inflation is moving down to 2% on a sustained bass… we need more good readings on inflation (like) last year….”
“The decision to cut rates is a very important one …,” he said, adding that “it’s too soon to change” policy because if inflation were to worsen again, then “we would have to come back in.”
As he has before, Powell conceded that “the outlook is always uncertain,” and if the economy were to prove weaker than expected, the FOMC would react accordingly) … “If that’s what happens that’s what we’ll do,” he said. “But it’s important to get this right.’
As it is, Powell said “the economy is very strong … growth was over 3% (last year )… and many expect it to come down to 2% …. That means we don’t need to be in a hurry to cut.. we can wait and be more confident that inflation is coming down to 2% on a sustainable basis .…”
Reinforcing the message, he asserted, “We want to be more confident before we take that step …. Monetary policy is well-placed to react to different paths of data ….”
““Our main focus is on getting it right …,” Powell went on. “That’s the most important thing…then everything else falls into place…If things work out differently than the base case …. We can handle whatever case comes .…”
Regarding the outlook for inflation, Powell recalled, “We have said we expect it to move down to 2% but on a path that is somewhat bumpy …. The question is if It’s more than bumps …. We’re just going to have to let data tell us that ….”
“Our position is we don’t know,” he continued. “We will tell you what we’ll do if inflation comes down …. That’s our base case – a bumpy path down to 2%.”
If inflation fails to fall toward 2% as hoped, Powell said the Fed may have to choose a more hawkish course. “If that doesn’t happen … we can hold rates higher for longer ….”
In a parting shot across Wall Street’s bow, Powell declared, “We are not going to take that step until we are confident ….”
Regarding the Fed’s announced strategy of reducing the size of the Fed’s balance sheet more slowly, he said, “we will slow (run-offs) at a certain point .… That’s not at all related to concern about the economy; it’s our plan.”
Powell’s comments culminate a series of Fed remarks that seemed designed to push back against continued financial market rate cut hopes.
Earlier this week, Fed Governor Lisa Cook sounded hopeful about the inflation outlook, but yet tentative about rate cutting: “(R)isks to achieving our employment and inflation goals are moving into better balance. Nonetheless, fully restoring price stability may take a cautious approach to easing monetary policy over time.”
Elaborating on the “balance of risks” in the conduct of monetary policy, Cook said, “The risk of easing monetary policy too much or too soon is that it could allow above-target inflation to become entrenched and halt the progress that we have seen. That would ultimately require more-restrictive monetary policy to wring more-persistent inflation out of the economy, at a potentially high cost to employment.”
“But easing too late could also do unnecessary harm by holding back the economy and depriving people of economic opportunities,” she continued. “The path of disinflation, as expected, has been bumpy and uneven, but a careful approach to further policy adjustments can ensure that inflation will return sustainably to 2 percent while striving to maintain the strong labor market.”
Meanwhile, Chicago Federal Reserve Bank President Austan Goolsbee said the FOMC’s three projected rate cuts are “in line with my thinking” and expressed the belief that disappointing January and February inflation numbers are not indicative of the underlying inflation trend: “It seems hard for me to view that the seven months previous to the start of this year were just random.”
By contrast, on Friday, Atlanta Fed President Raphael Bostic had said he only sees one rate cut in 2024 and not until later this year.
Governor Christopher Waller was even more emphatic in saying the Fed needs to take its time easing policy Wednesday night in a speech titled “There’s Still No Rush.”
He told the Economic Club of New York that “we made a lot of headway toward our inflation goal in 2023, and the labor market moved substantially into better balance, all while holding the unemployment rate below 4% for nearly two years.” But he quickly added that “the data we have received so far this year has made me uncertain about the speed of continued progress.”
In February, Waller recalled that “hotter than expected” January data on job growth and inflation led him to conclude that “we needed time to verify that the progress on inflation we saw in the second half of 2023 would continue, which meant there was no rush to begin cutting interest rates to normalize the stance of monetary policy.”
Now, he said, “additional economic data has reinforced this view.” He pointed to resurgent February job gains; the 0.4% January increase in core PCE inflation, and the 0.4% February rise in the consumer price index.
“Adding this new data to what we saw earlier in the year reinforces my view that there is no rush to cut the policy rate,” Waller said. “Indeed, it tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%.”
Waller did not rule out 2024 rate cuts. “I continue to believe that further progress will make it appropriate for the FOMC to begin reducing the target range for the federal funds rate this year.”
However, he went on, “until that progress materializes, I am not ready to take that step.” He said the strength of the economy and labor markets mean “the risk of waiting a little longer to ease policy is small and significantly lower than acting too soon and possibly squandering our progress on inflation.”
Waller did allow for a change in his policy perspective. “Subsequent data may well alter this outlook again,” he said, “but we shall see. Based on what we know now, there is no urgency in taking that step.”
Waller has shown himself capable of changing his views before. In late November, he made a stir by hinting at potential first half rate cuts: “If the decline in inflation continues “for several more months … three months, four months, five months … we could start lowering the policy rate just because inflation is lower.”
In their March 22 Summary of Economic Projections, the 19 FOMC participants projected the same number of rate cuts as in the Dec. 13 SEP – a total of three 25 basis point cuts that would leave the funds rate at a median 4.6% (a target range of 4.5% to 5.0%) — instead of reducing the number of projected rate cuts to two, as many though it might.
However, the March configuration of the “dots” differed significantly from December. Whereas in December, 16 officials projected a funds rate below 5% by the end of 2024, in March, only 15 projected the rate going below 5%. In March, nine participants projected a 4.6%, compared to six in December, while the number of officials projecting a 4.9% rate remained the same at five. But the number of officials projecting the funds rate will end the year above 5% rose from three to four.
What’s more, while FOMC participants did not reduce the number of projected rate cuts for 2024, they did scale back their rate cut projections for 2025 and 2026. They now see the funds rate ending next year at a median 3.9% (up from 3.6% in December’s SEP) and ending 2026 at 3.1% (up from 2.9%).