March Fed Decision: The final mile is the hardest

The latest decision

In what has become a familiar formula, Fed Chairman Jerome Powell expressed in his press meeting on January 31st that while he was ‘encouraged’ by the progress, it is still too soon to declare victory.

The Fed has already indicated that three rate cuts could be expected in 2024.^[1] In an interview with 60 Minutes on February 5th, however, Powell poured cold water on market hopes of a rate cut as soon as March.^[2]

Minutes from the January Fed meeting suggest that the majority of committee members remain concerned about cutting rates too soon, before inflation had truly been brought back under control. The continued strength of economic demand, combined with global instability (e.g. Red Sea shipping), were the main reasons cited.^[3]

Demand and Inflation

The labor market figures released on February 2nd were surprisingly strong, close to double expectations (353,000 vs 185,000), reinforcing the view that upward pricing pressure is still a threat.^[4] The Consumer Price Index (CPI) and Producer Price Index (PPI) also came in higher than expectations for January at 3.1% (vs 2.9%)^[5] and 0.9% (vs 0.7%)^[6].

However, the latest employment figures from March 8 show that the January employment figures were lower than initially reported (229,000). Furthermore, employment has ticked upwards to 3.9%, implying a cooling labor market.

The Fed’s preferred gauge of progress on inflation is the Personal Consumption Expenditures (PCE) index, which reached a high of 7% in June 2022. The January figures came in at 2.4%, or 2.8% on a ‘core’ basis, both of which were in line with expectations and below December figures. Looking at the last six months in isolation, Core PCE has effectively reached the 2% target.^[7]

The overall picture, therefore, looks positive. If both growth and inflation continue in their current course, the US will achieve the ‘soft landing’ many thought impossible.

Powell’s testimony

On March 6th and 7th, Powell testified before the House Financial Services Committee, initially appearing to reiterate his former remarks to the effect that more data is needed to provide confidence that inflation is sustainably under control.

He further clarified, however, that he believed rates are ‘well into restrictive territory’ - meaning that rates are not currently at a ‘neutral’ or normal level - and that the central bank is ‘not far’ from being able to cut rates again.^[8]

According to the CME FedWatch Tool, the markets are predicting rates will hold steady at the upcoming March meeting, with the majority predicting a first rate cut in June.^[9]

Conclusion

As Philadelphia Fed President Patrick Harker points out, while the data suggest that we are in the final mile of the marathon, “As anyone who has ever run a marathon can tell you the final mile is often the hardest.”^[10]

The Fed’s response, while never predictable, has been fairly consistent in its commitment to caution and unwillingness to be swayed by pressure from the market or over-optimism based on the emerging data.

This exemplifies the attitude of a good investor: always keeping the long-term goal first and foremost.

^[1] U.S. Federal Reserve

^[2] CBS News

^[3] U.S. Federal Reserve

^[4] U.S. Bureau of Labor Statistics

^[5] Barrons

^[6] CNN

^[7] Bureau of Economic Analysis

^[8] Wall Street Journal

^[9] CME Group

^[10] Philadelphia Federal Reserve