We Do Not Need To Be In A Hurry

No change and no real hints about the future. Pretty ho-hum, which is exactly what Powell wanted for his first meeting after Trump took office. Maybe a tad hawkish, but nothing significant.

He was asked if a March cut is still on the table? “We do not need to be in a hurry to adjust our policy stance.” This feels like March is off the table barring some surprisingly weak job data. If job data comes out halfway decent, it certainly sounds like cuts may be off the table until the second half of the year.

But it’s also clear he does believe there are more rate cuts to come. “I would say we’re meaningfully above neutral.”

No mention of hikes, which is a huge disappointment to all the people that believe the Cowboys are still America’s team are worried about a repeat of the 1970s.

On the labor market, he was asked what risks might challenge his confidence in the strength of the labor market. I thought his answer was interesting because he first described new hiring as weak, and then “A spike in layoffs would lead to the unemployment rate going up very quickly because hiring is so low.” If hiring doesn’t improve, the margin for error is smaller than it has been over the last two years.

The biggest change to the statement was the removal of the line from the last FOMC statement that “inflation has made progress.” When asked if we should read into that the Fed is worried about progress, Powell said “No, this was just language clean up.” Rates dropped a couple of bps after this, and stocks popped a little. The market exhaled.

As expected, the 1st question was about Trump demanding rates drop immediately

• “I’ve had no contact” with the president
  
  

You said at the last meeting that rates are “meaningfully restrictive”, how has that changed?

• “I don’t think my assessment has changed”
  • This implies they expect cuts on an undetermined timeline
• “But it is less restrictive than it was six months ago”
• “Our policy stance is very well calibrated” and “policy is well positioned”
• “At 4.3%, we’re above everyone’s estimation of neutral. Our eyes are telling us our policies are affecting the economy.”

Inflation

• “We are not gonna change the inflation goal…anytime soon” struck me as very interesting. I bet he can’t wait to hit 2% and then immediately chuck that target into the ocean.
• “Inflation is somewhat elevated”
• “Homeowner’s equivalent rent is steadily coming down now so we seem to be set up for further progress.”
  • Finally!!!
• “We’ve never said we need to be at 2% to cut rates again” and since policy is “meaningfully restrictive” the Fed will cut again before that point
• When asked if inflation needs to be better than forecasted to cut again, he seemed to push back. “The expectation is that we will continue to see inflation progress” which then leads to further easing. “We’ll know it when we see it.”

Inflation expectations

• “Expectations have ticked up on the front end, but not on the longer end which is what really matters”
• “Inflation expectations remained well anchored”

Labor

• “Labor market does appear to be pretty stable and in balance”
• “We are in a low hire environment”
• “We don’t think we need the labor market to cool off any more”
• “Lower income households are under significant pressure”

Trump policies

• “We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy. We need to let those policies be articulated.”

Ending QT

• “Reserves are abundant” which means no planned wind down of QT (QT applies some upward pressure on rates)

Remember, the Fed doesn’t expect inflation to hit 2% until 2026. The goal hasn’t changed, they are just comfortable with that taking a while.

Markets have a 23% chance of a cut in March, which would require jobs data coming in pretty bad starting next week.

The May meeting is a coin toss.

Year end has a 60% chance of FF < 4% (at least two more cuts)

Rates are up about 2bps across the curve.

“Right now we feel we are in a very good place.” - Powell

Same for Birds fans.