Evening Brief – 03.06.24
Hold Your Horses
Federal Reserve Chair Jerome Powell said policymakers are on pace to ease monetary policy later this year, but he reiterated to lawmakers that the FOMC is in no rush to cut rates until it is confident that it has won the battle against inflation.
“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%,” he said in prepared remarks before the House Financial Services Committee on the first of two days of his semi-annual monetary policy testimony. He is slated to appear before the Senate Banking Committee on Thursday.
The view is that the central bank will begin to ease policy at the June 12 FOMC meeting. The Fed funds futures market is currently pricing in a nearly 70% chance that the committee will lower rates at that time.
Although most market participants still expect a rate cut in June, confidence has waned in recent weeks. One factor is that recent inflation data has been a bit hotter than predicted. Another point to consider is that US economic activity remains strong. That combination questions whether the Fed will indeed start to cut rates in June.
Fed officials have been attempting to reduce expectations that a change in policy change is imminent. Tom Barkin, president of the Richmond Federal Reserve, recently voiced concern about the likelihood of cuts. “We’ll see,” he told CNBC. “I’m still hopeful inflation is going to come down and if inflation normalizes, then it makes the case for why you’d want to start normalizing rates.”
The Treasury market, on the other hand, remains relatively confident that a rate cut is on the way, as evidenced by the 2-year yield, which remains significantly lower than the Fed funds target rate. The problem, of course, is that the Treasury market’s implied projection for a lower target rate is more than a year old, making it unclear whether this outlook is accurate.
What is clear is that monetary policy is restrictive, based on recent employment (JOLTS, initial claims) and inflation metrics.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said. “But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”