– Powell: Will Take Longer To Be Confident Inflation Headed to 2%
– Rates Could Go Higher If FOMC Persuaded Not ‘Sufficiently Restrictive”
– QT Dialed Back To ‘Smooth’ Balance Sheet Normalization, Not Help Economy
By Steven K. Beckner
(MaceNews) – The Federal Reserve left short-term interest rates unchanged Wednesday and signaled further delay of any easing of monetary policy on the rate side, but it simultaneously announced a near-term moderation of so-called “quantitative tightening” which could affect long-term rates.
After the Fed’s ’s policymaking Federal Open Market Committee unanimously left the federal funds rate in a 5.25% to 5.50% target range for the sixth straight meeting, Chairman Jerome Powell reiterated that the apparent stalling out of progress against inflation means the funds rate will likely need to stay at current levels for longer than previously expected.
The Fed chief said he does not think it likely that the FOMC will need to raise the funds rate, although he didn’t rule that out. Rather, he said, the issue is how long it will need to stay at the current rate level.
Barring an “unexpected weakening of the labor market,” he said it will probably take longer than expected to gain the requisite “confidence” that inflation is “moving sustainably toward 2%.
While declining again to ease policy by lowering rates, the FOMC moved in the opposite direction on its policy of shrinking its balance sheet — popularly known as “QT.” It announced that, beginning next month, it will lessen the pace at which it is reducing its securities portfolio by allowing fewer maturing securities to “run off” of its System Open Market Account portfolio.
But while taking upward pressure off of long-term rates, the FOMC gave Wall Street little encouragement that lower short-term rates are in the offing. It retained this key sentence in its policy statement: “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 statement’s characterization of economic conditions was altered to reflect heightened concern about disappointing inflation statistics. After repeating that “inflation remains elevated,” it added: “In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”
At their March 20 meeting, FOMC participants projected three 25 basis point rate cuts by the end of 2024, as they had in December. By contrast, when the year began, markets were expecting six or more rate cuts, beginning in May.
Such hopes were dashed by January-March reports on the price index for personal consumption expenditures, the Consumer Price Index and other price gauges which showed inflation averaging more than 3 ½%. Meanwhile, other data showed strong consumer demand and continued labor market strains, which Fed economists see as exerting upward pressure on wages and on prices for services.
In mid-April, Powell rocked markets by declaring, “The recent data have clearly not given us greater confidence” that inflation is headed toward 2%. Instead, they suggest, “It is likely to take longer than expected to achieve that confidence.”
“Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he added, echoing what other Fed officials and many Fed watchers had already concluded,
About the same time, in a coordinated effort by Fed leadership, Vice Chairman Phillip Jefferson and New York Federal Reserve Bank President John Williams, sent similar signals.
In Wednesday’s post-FOMC press conference, Powell reinforced that message of delay. “We … do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%.”
“So far this year, the data have not given us that greater confidence,” he continued. “In particular, … readings on inflation have come in above expectations.
Powell said, “It is likely that gaining such greater confidence will take longer than previously expected. We are prepared to maintain the current target range for the federal funds rate as long as appropriate.”
The only factor that might cause an earlier rate hike, he allowed, would be “an unexpected weakening in the labor market.”
But Powell warned that “reducing policy restraint too soon or too much can reduce the progress we’ve seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
He returned to that basic theme throughout his press conference as reporters tried to probe for the likely timing of rate cuts.
He was also asked whether rates might need to go higher if, for example, economic growth and labor markets remain strong and inflation stays above target.
Powell replied that he does think monetary policy is not just “restrictive” but that “over time, it will be sufficiently restrictive.”
“I think it’s unlikely that the next policy rate move will be a hike,” Powell said, adding, “our policy focus is really … how long to keep policy restrictive.”
Asked what it would take to convince the FOMC that rates are not high enough, Powell replied, “We need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation down to 2%. That’s not what I think we’re seeing. … We look at the totality of the data to answer that question. That would include inflation. Inflation expectations and all the other data, too.”
FOMC participants did not revise their funds rate projections at this meeting, but if they had Powell’s comments and the tone of the FOMC statement seem to imply that, at most, they might have projected only one 2024 rate cut.
The FOMC moved in a very different, but widely anticipated direction, with regard to its balance sheet strategy. The Fed has been reducing the size of its balance sheet by a combined $95 billion per month by declining to reinvest maturing Treasury and mortgage backed securities.
Beginning in June, the FOMC announced, the Fed will reduce the “cap” for Treasury run-offs. It authorized the New York Fed to roll over at auction the amount of principal payments from the Fed’s holdings that exceeds a cap of $25 billion per month – down from $60 billion.
The FOMC left unchanged the amount of MBS reinvestments at $35 billion per month, but said it will reinvest any principal payments in excess of this cap into Treasury securities.
The net result will be that run-offs (and balance sheet shrinkage) will be reduced by $60 billion per month instead of $95 billion per month.
Elaborating on the announcement, Powell said, “A decision to slow the pace of run-off does not mean that our balance sheet will ultimately shrink by less than it would otherwise, but rather allows us to approach its ultimate level more gradually.”
“In particular, slowing the pace of run-off will help ensure a smooth transition, reducing the possibility that money markets experience stress and thereby ensuring our holdings that are consistent with reaching the level of ample reserves,” he continued.
Powell denied any contradiction between the FOMC’s standing pat on the funds rate and proceeding with a moderation of QT.
“I wouldn’t say that, no,” he said. “The active tool of monetary policy, of course, is interest rates. This is a plan we’ve long had in place –to slow really — not in order to provide accommodation to the economy or to be less restrictive in the economy.”
“It’s really to ensure that the process of shrinking the balance sheet down to where we want to get it is a smooth one and doesn’t wind up with financial market turmoil the way it did the last time we did this,” he added.
In recent weeks, inflation and growth worries have led to a spike in bond yields, with the 10-year Treasury note climbing as high as 4.737%, compared to 3.946% at the start of the year. A slower pace of QT might help limit yields.
Powell seemed unperturbed. “(Long-term) rates have been higher now ad have been for some time before they were at the December meeting,” but “that’s appropriate given what inflation has done in the first quarter.”
Powell refused to speculate on when the FOMC might cut the funds rate or under what circumstances, saying it will make “judgment calls” on a “meeting by meeting” basis after evaluating all of the data.
“Our decisions we make on our policy rate will depend on the incoming data, how the outlook is evolving and the balance of risks, as always,” he said. “We’ll look at the totality of the data. We think that policy is well positioned to address different paths that the economy might take.”
“We don’t think it would be appropriate to dial back our restrictive policy stance until we’ve gained greater confidence that inflation is moving down sustainably to 2%, he went on.
Powell said there are different “paths” the economy and in turn monetary policy could take,.
For example, “If we had a path where inflation proves more persistent than expected and where the labor market remains strong but inflation is moving sideways, and we’re not gaining greater confidence, that would be a case in which it could be appropriate to hold off on rate cuts.”
“ I think there are other paths that the economy could take which would cause us to want to consider rate cuts,’ Powell continued. “ Two of those paths would be that we do gain greater confidence, as we said, if inflation is moving sustainably down to 2%. Another path could be an unexpected weakening in the labor market, for example.”
“Those are paths in which you could see us cutting rates,” he said. “I think it really will depend on the data. In terms of peak rate, I think really it’s the same question. I think the data will have to answer that question for us.”
Powell said he and the FOMC have “set ourselves a test. For us to begin to reduce policy restriction, we want to be confident that inflation is moving sustainably down to 2%. For sure, one of the things we would be looking at is the performance of inflation. We would look at inflation expectations. We would be looking at the whole story. Clearly, incoming inflation data would be at the very heart of that decision.”
Powell said his “expectation is that over course of this year, we will see inflation come back down,” but he added, “my confidence in that is lower.”
He also expressed some concern about the pace of wage increases in labor markets, which he still described as “tight.”
“We don’t target wages,” he said, but added that he would like to see “wage increases move down incrementally toward levels that are more sustainable.”
—
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety, contact tony@macenews.com. X (Twitter) news-flow headlines @macenewsmacro.