– Powell: Unlikely FOMC Would Cut Rates As Soon As March Meeting- FOMC Now Speaks of ‘Any Adjustments’ To Federal Funds Rate
– FOMC Advises No Rate Cuts Until Confident Inflation Sustainably On Way to 2%
– FOMC: Risks ‘Moving Into Better Balance,’ But Outlook ‘Uncertain’
– FOMC Gives No Sign Ready to Dial Back Quantitative Tightening
By Steven K. Beckner
(MaceNews) – Once again, the Federal Reserve’s policy making Federal Open Market Committee left short-term interest rates unchanged Wednesday, but it took a small though consequential step toward an eventual shift in monetary policy, seemingly opening the door a crack to eventual rate cuts.
For a fourth straight meeting, the FOMC left its federal funds rate target in a 5.25% to 5.50% target range, but abandoned a long-standing tightening bias and moved to a more neutral policy directive in its policy statement. .
At the same time, though, the FOMC stressed it will not be ready to start cutting the funds rate until it has more “confidence” that inflation is heading “sustainably” to its 2% target.
Chairman Jerome Powell gave strong indications that he and his fellow policymakers are edging closer to rate cuts, but at the same time he made it clear that he and his colleagues are not that close. He explicitly said that the Committee’s March 19-20 is not a likely time frame for starting to ease policy.
Echoing the policy statement in a press conference, the Fed chief continually stressed the need to become “more confident” that inflation is headed “sustainably“ down to 2% and to move “carefully.”
Powell allowed for cutting rates “sooner and faster” if the economy weakens and/or if inflation falls more than expected, but also said the Fed would move “later and slower” if the opposite occurs.
If inflation should reaccelerate, he said the FOMC “would have to respond.” So he said the FOMC is “keeping its options open” and proceeding cautiously.
There were significant changes to the FOMC’s policy statement, most notably entirely new language on the direction of rates.
Gone was the previous declaration that the FOMC would take certain factors into consideration “in determining the extent of any additional policy firming that may be appropriate to return inflation to 2% over time.”
Instead, the FOMC now says, “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.”
Lest markets jump to the conclusion that it is on the verge of cutting rates in the near term, the FOMC added, “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.”
What’s more, the FOMC added other important language, which serves to underscore a cautious approach toward an eventual policy shift. “The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance,” it says.
But once again, the FOMC seemingly seeks to dampen rate cut speculation by adding, “The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.”
Notably too, the FOMC kept the same language on inflation in the first paragraph, repeating, “Inflation has eased over the past year but remains elevated.”
The FOMC gave no indication that it’s close to changing balance sheet strategy as yet, declaring, “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
Powell said he and his colleagues will begin more seriously discussing when and how to dial back so-called “quantitative tightening’ at the March meeting, but was vague about when they will actually start reducing or halting the run-off of maturing securities in the Fed’s portfolio.
He said it’s possible the Fed could continue shrinking its balance sheet at the same time that it is cutting rates.
In December, FOMC participants projected 75 basis points of rate cuts by the end of 2024, which would take the funds rate to a median 4.6%, but for now Powell and his colleagues are being cagey about the amount and timing of rate cuts as they linked the rate path to further convincing progress against inflation.
As four different Federal Reserve Bank Presidents rotated into voting position for 2024, Cleveland’s Loretta Mester, Richmond’s Thomas Barkin, Atlanta’s Raphael Bostic and
San Francisco’s Mary Daly joined New York Fed President John Williams and the members of the Board of Governors in a unanimous vote to leave the funds rate at a median 5.3%.
Financial markets are usually fairly well attuned to Fed policy, but since the mid-December FOMC meeting, members have been in something of a tussle with Wall Street over how soon and much it will cut rates. After an overeager Wall Street responded to officials’ projections of three rate cuts by pricing in as much as six cuts, a host of officials cautioned against “premature” speculation.
Markets have nonetheless persisted in expecting more than the 75 basis points of rate cuts which FOMC participants projected in December. High odds have been put on rate cuts beginning in May, if not March.
Powell seemed to go out of his way to downplay such hopes. “I don’t think it’s likely we will reach the level of confidence (needed) by the March meeting,” he said, adding, “March is probably not the most likely or base case.”
Preceding the meeting, the Commerce Department reported that the price index for personal consumption expenditures (PCE) moderated further in December, rising 2.6% from a year earlier overall, while the core PCE rose 2.9% — first time that key gauge had been below 3% since March 2021. By contrast, the consumer price index was up 3.4% overall and 3.9% on a core basis from a year earlier last month.
Powell acknowledged “that is very good news,” but added, “inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.”
“The lower inflation readings over the second half of last year are welcome, but we will need to see continuing evidence to build confidence that inflation is moving down sustainably toward our goal,” he said.
Powell said the funds rate is “likely at its peak for this tightening cycle and that, if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
However, he immediately added that “the economy has surprised forecasters in many ways since the pandemic, and ongoing progress toward our 2 percent inflation objective is not assured. The economic outlook is uncertain, and we remain highly attentive to inflation risks.”
So Powell said the FOMC is “prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”
Although the risks to the Fed’s dual mandate of full employment and price stability “are moving into better balance,” he warned 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%.’
On the other hand, he went on, “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
So Powell said the FOMC will go “meeting by meeting,” assess the data and delay rate cuts “until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Pressed by reporters on when the FOMC will be confident enough to start cutting rates and what that will take, Powell was nebulous.
He said “it seems likely … we will achieve that confidence, but we have to achieve that confidence. We haven’t achieved it yet…. . We just need to see more evidence that sort of confirms what we think we’re seeing.”
Powell said “almost every member of the Committee thinks it will be appropriate” to reduce rates at some point but said, “what we’re trying to do is identify….where we can begin dialing back the restrictive level…”
Referring to December’s 75 basis point rate cut projections, he said he and his colleagues have to “get to where we’re comfortable…We need confirmation that inflation is coming down sustainably to 2%.”
Powell said the FOMC is also “not confident” about the level of the “neutral” funds rate.
He indicated the FOMC is prepared to be flexible with monetary policy, depending on how the economy evolves.
For instance, “If we saw an unexpected weakening, say, in the labor market that would weigh toward cutting rate sooner, certainly.” On the other hand, if the economy proved to be stronger than expected and/or if inflation fails to sustain recent declines or even reverse its progress, he said the Fed would have to delay rate cuts and possibly keep rates higher for longer.
The “base case” for the FOMC is solid growth, a strong labor market and inflation coming down, he said, If that scenario should play out, he said the Fed can “be careful” and “lbegin to dial back restriction..”
But Powell added, “we’re not really at that stage.” And he said “no one called for cut in rates” at Wednesday’s meeting. “We’re not at a place where we’re working out those kinds of details…. .We’re not actively considering moving the funds rate” down.)
Asked if the Fed has achieved a “soft landing,” he replied, “No, I wouldn’t say we’ve achieved that … inflation is still (too high)…we’re encouraged by the progress, but we’re not declaring victory… . We have a ways to go.”
Powell said there is “a risk..that inflation could reaccelerate,” but said, “the greater risk is that it would stabilize at a level above 2%…”
“If inflation were to surprise by moving back up we would have to respond…,” he continued. “That would be a surprise.. that’s why we’re keeping our options open here” and not rushing.
“We want to get comfort on that,” he added.
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