– 2024 Rate Cut Projections Stay at Three – to 4.6%; Rate Cuts Trimmed for 2025, 2026
– Powell: FOMC Wants ‘Confirmation’ Inflation Falling After Jan, Feb Data
– Powell: FOMC Could Decide To Curb Balance Sheet Run-off “Fairly Soon”
By Steven K. Beckner
(MaceNews) – Not long ago, many were expecting the Federal Reserve to start cutting short-term interest rates in March, but now the prominent guessing is that the first rate cut won’t come until June, and if Wednesday’s utterances from Fed Chairman Jerome Powell and his fellow policymakers are any indication, even that could prove overly optimistic.
While leaving the federal funds rate unchanged for a fifth straight meeting Wednesday, the Fed’s rate-setting Federal Open Market Committee again signaled that lower rates are coming, but not necessarily as soon as many would like.
Powell and his colleagues made clear that any monetary easing will probably come later and be much less ambitious than financial markets had been hoping for.
Signs that once rapid disinflation might have stalled, coupled with stronger-than-expected economic growth, gave Fed policymakers “pause,” he strongly suggested in his post-FOMC press conference
Powell repeatedly emphasized that policymakers need “confidence” and “confirmation” that inflation is headed toward 2% and said that the strength of the economy and labor markets allow the FOMC to take a “careful” approach.
Cutting rates too soon or too much could endanger anti-inflation progress already made and force the Fed to re-tighten monetary policy, he warned.
Powell also cited a countervailing risk of delaying rate cuts for too long and said that “unexpected weakening” in the labor market could force earlier easing, but he said that’s not what the Fed is seeing as he continued to emphasize the primary importance of getting better inflation numbers after two “bumpy” months.
Powell was vague about when rate cuts might begin, and FOMC participants continued to project just 75 basis point rate cuts this year, the same as in December — far less than the 150 basis points or more that Wall Street had been pricing in until recently.
The FOMC left the federal funds rate in a target range of 5.25% to 5.50%, where it’s been since the Committee last raised its policy rate in July of 2023.
Fed policymakers retained the more neutral guidance adopted in January, when they abandoned a long-standing tightening bias.
“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 FOMC statement said. “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%.”
Powell repeated that the funds rate is “likely near its peak for the tightening cycle” and said it will likely be reduced at some point. However, he stressed the FOMC will be in no hurry to start cutting rates.
Moreover, in their revised, quarterly Summary of Economic Projections the 19 FOMC participants lowered their funds rate cut projections over the next few years. Contrary to what some had speculated, the officials did not lower their funds rate cut projections for 2024. They still project three 25 basis point rate cuts this year, leaving median rate at 4.6%.
FOMC participants did, however, 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%).
There was also significant movement in the range of projections: for 2024 — 4.4% to 5.4% vs. December’s 3.9% to 5.4%.
Another notable thing is that, after much delay, the FOMC participants raised their estimate of longer run funds rate, which includes the 2% inflation target plus an estimate of the real equilibrium short-term interest rate, by a tenth to 2.6% — implying a higher real rate assumption and in turn a higher appropriate neutral funds rate.
As expected, the FOMC discussed the Fed’s balance sheet strategy. For now, the FOMC said it “will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans.”
But Powell suggested a tapering of balance sheet shrinkage may well be in the offing before long, telling reporters a decision to slow the rate of taper could come “fairly soon.”
The economic forecasts accompanying the rate projections support the go-slow approach….for now. The forecast of 2.1% real GDP growth, though down from last year’s actual 3.1%, is still three-tenths above the longer run estimate of 1.8%. The unemployment rate is now forecast to be a tenth lower than in December at 4.0%.
The Labor Department reported the unemployment rate up two tenths in February to 3.9%, but that’s still historically low and two tenths below the FOMC’s estimate of the “longer run” unemployment rate.
FOMC participants now see inflation, as measured by the price index for personal consumption expenditures (PCE), ending this year at 2.4% and next year at 2.2%, before reaching the 2.0% target in 2026. They forecast the core PCE to end 2024 at 2.6%, compared to a December forecasts of 2.4%.
Leading up to the meeting, Fed officials had warned that the road to 2% inflation would be “bumpy,” and as if to prove them right, the Labor Department released a disappointing February consumer price index report. The CPI rose 0.4% and 3.2% from a year earlier, up from 0.3% and 3.1%. The core CPI rose 0.4% for the month and 3.8% year-over-year. That came on top of a New York Fed survey finding an increase in inflation expectations.
Powell said the January and February inflation disappointments might have been skewed by “seasonal factors,” but said the Fed can’t afford to assume that was the case.
“We need to see more” inflation data, he said,. “We’re not going to overreact to two months of data. Neither are we going to ignore them.”
Powell said “the committee needs to maintain confidence and we don’t expect it will be appropriate to begin to reduce rates until we’re more confident than that… .We had made significant progress over the past year and what we’re looking for was confirmation that that progress will continue.”
“We will have to see how the data come in,” Powell said. “We would of course love to get really good inflation data. We got good inflation data at the second part of last year. We said we needed to see more and it would be bumpy. Now we have January and February which I talked about a couple times. We are looking for more and we will certainly welcome it.”
Throughout his press conference, Powell largely echoed his recent testimony on the Fed’s semi-annual Monetary Policy Report to Congress, in which he said, “We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
“But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured,” Powell continued in two days of congressional testimony. “Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in 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 policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks,” the Fed chief went on. “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.“
Explaining the FOMC’s latest decision to keep monetary policy on hold, Powell said, “We believe that our policy rate is likely at its peak for this time in the cycle and if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. “
But he added, “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. “
Taking his familiar “risk management” approach, Powell told reporters.“ 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%. “
“At the same time, reducing policy restraint too late or too little could unduly — employment — considering any — evolving outlook and a balance of risks.”
Echoing the FOMC statement, Powell said he and his fellow policymakers do “not expect it will be appropriate to reduce the target range until it has gained confidence that inflation is moving sustainably down towards 2%.”
Powell added that “an unexpected weakening in the labor market could warrant a policy response,” but made clear in response to questions that he considers that unlikely.
Powell did not move off of these basic themes as reporters tried to draw him out on the likely timing of rate cuts. FOMC decisions will be made “meeting by meeting,” he said, refusing to speculate about what might happen at the May or June meetings or beyond.
Pressed on when the FOMC will be sufficiently “confident” in disinflation to start easing policy, Powell indicated it is premature to come to such a conclusion after two months of worse-than-expected inflation reports. Besides, he said, the strength of the economy and labor markets gives the FOMC the luxury of waiting..
“We’re going to let the data show,” he said. “I don’t think we really know if this is a bump on the road or more. We will have to find out.”
“ In the meantime, the economy is strong,” he continued. “Inflation has come way down and that gives us the ability to evaluate this question carefully — move confidently that inflation is moving down to 2% when we begin dialing back our restrictive policy..
Elaborating on the inflation picture, he said the January and February CPI and PCE inflation reports “certainly hasn’t raised anyone’s confidence,” but said, “I would say that the story is really essentially the same, and that is of inflation coming down gradually toward 2% on a sometimes-bumpy path.”
“We’ve got 9 months of 2.5% inflation now,” he continued. “We’ve had 2 months of bumpy inflation. It’s going to be a bumpy ride. We’ve consistently said that. Now we have bumps.”
“ We can’t know that” inflation is heading sustainably to 2%, Powell went on. “That is why we are approaching this question carefully. It is very important for everyone that we serve that we do get inflation sustainably down.”
“Every situation is different but the historical record is you need to approach that carefully and not have to come back and raise rates again if you cut it prematurely,” he added.
Asked if the FOMC might have enough evidence to justify starting to ease policy in May or June, Powell replied, “you know, things happen during an inter-meeting period if you look back — unexpected things. I wouldn’t want to dismiss anything. “
But he quickly reiterated, that “the committee wants to see more data that gives us higher confidence that inflation is moving down sustainably toward 2%. “
“I also mentioned — we don’t see this in the data right now, but if there were a significant weakening in the data — particularly in the labor market — that could also be a reason for us to begin the process of raising rates again,” Powell continued. “(There’s) nothing in the data pointing at that, but those are the things that we’ll be looking at at coming meetings without trying to refer to any specific meeting.”
The Fed chief also made several references to wages, which have lately picked up according ot the Atlanta Federal Reserve Bank’s wage tracker to an annual rate of 5%.
Powell emphasized that the Fed targets inflation, not wages, but said, “We would look to the fact that wages are still coming in very strong but they’ve been wage increases — wage increases have been quite strong but they’re gradually coming down to levels that are more sustainable over time. That is what we want.“
“We don’t think — the inflation was not originally caused — I don’t think by — mostly by wages,” he elaborated. ‘That wasn’t really the story. But we do think that to get inflation back down to 2% sustainably we would like to see continuing gradual movement of wage increases at still high levels but back down to levels that are more sustainable over time.”
On the quantitative side of monetary policy, the Fed’s securities portfolio has been reduced by nearly $1.5 trillion through $95 billion of monthly run-offs of maturing Treasury and agency mortgage backed securities. Now, Powell said, the FOMC “discussed issues related to slowing the pace of decline in our securities holdings.”
“ While we did not make any decisions today on this, the general sense of the committee is that it will be appropriate to slow the pace of run-off fairly soon,” he said.
Powell emphasized that “the decision to slow the pace of run-off does not mean our balance sheet will shrink but allows us to approach that ultimate level more gradually. In particular, slowing the pace of run-off will help ensure the transition reducing the possibility of money markets and facilitating the ongoing decline in security holdings, increasing the ample reserves.”
Responding to questions on the balance sheet strategy, Powell said “what we’re really looking at is slowing the pace of run offs … . We’re talking about going to a lower pace.”
“I don’t want to give you a specific number because we haven’t made an agreement or a decision,” he said. “In terms of the timing, I would say ‘fairly soon.’ I don’t want to be more specific than that. …This is in our longer-run plans.”
“We may actually be able to get to a lower level because we would avoid the kind of fictions that can happen,” he went on.
“Liquidity is not (evenly) distributed in the system,” he explained. “There can be times when, in the aggregate, reserves are ample or even abundant, but not in every part. Those parts where they’re not ample, there can be stress.”
Powell said the FOMC would not want to “prematurely” change its balance sheet strategy, only to have to reverse course as happened in 2019. So, he said, “we’re looking at what would be a good time and a good structure. ‘Fairly soon’” is words we use to mean fairly soon.”
Powell said the FOMC’s “longer-run goal is to return to a balance sheet that is mostly treasuries,” but said, “We will come back to the other issues about the composition and I am maturity and revisit those issues. It’s not urgent right now. We want to get this decision made first and then we can — when the time is right, come back to the other issues. “
The FOMC wants to “avoid any kind of turbulence” in money markets, Powell said. “This is our second time in doing this. I think we’re going to be paying a lot of attention to things that started to happen, at the end of the cycle where we ended up in a short-reserve” situation.
Asked if he wants to see the balance of the Fed’s Overnight Reverse Repurchase Facility dip further, Powell replied, “I think we broadly think once the overnight repo stabilizes at 0 or close to 0, that as the balance sheet shrinks we should expect reserves would decline pretty close to dollar for dollar with that.”
Explaining his advocacy of a gradual approach to tapering so-called quantitative tightening, Powell said, “It’s sort of ironic that by going slower you can get farther. The idea is that with a smoother transition, you won’t — you’ll run much less risk of kind of liquidity problems which can grow into shocks and cause you to drop the process prematurely.”
“ In terms of how it ends, we’re going to be monitoring carefully market selections and what they’re telling us about reserves,” he continued. “ Right now we would characterize them as abundant. We’re aiming for ample which is a little bit more than abundant.”
“There’s not a dollar amount or percent of GDP where we think we have a really pretty clear understanding that we’re going to be looking at what these — you know, what’s happening in money markets in particular — a bunch of different indicators including the ones I mentioned to tell us when we’re getting close.”
“Then, though, you reach a point ultimately where you stop allowing the balance sheet to run off and you — then, from that point, there’s another period in which non-reserve liabilities grow organically like currency and that also shrinks the reserves at a slow pace,” he further said. “ You have a slower pace of run-off which we will have fairly soon and you have another time where you effectively hold the balance sheet constant and allow non-reserve liabilities to understand and that brings it in to a nice, easy landing at a level which is above what we think the lowest possible ample number would be.
Rather than trying to get to the lowest possible level of reserves, he said, “We want to have a cushion — a buffer — the demand for reserves can be volatile and we don’t want to find ourselves in a situation where there’s reserve turn around, buy assets and put reserves back in the banking system the way we did in 2019-’20.”
—
Content may appear first or exclusively on the Mace News premium service. For real-time delivery in entirety contact tony@macenews.com. X (Twitter) headlines @macenewsmacro.