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At the risk of making Inflation Watch a lot less relevant and topical, I am pointing out that today’s meeting of the Federal Reserve essentially spoke of a victory over inflation. The threat of inflation has been vanquished; inflation is dead. In place of hawkishness and monetary tightening now comes “consideration of a time for cutting rates.” Fed Chair Powell wrestled with this concept throughout the press conference.The key trigger word was “any.” The first question from the press zoomed directly on the insertion of “any” in the following section of the Fed’s policy statement (emphasis mine):
“In determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”
Powell’s response essentially confirmed that the Fed thinks it is done fighting inflation with rate hikes. The Fed is so confident that it is now considering how to conduct a rate easing cycle.
“We added the word ‘any’ as an acknowledgement that we believe that we are likely at or near the peak rate for this cycle. Participants didn’t write down additional hikes that we believe are likely…but participants didn’t want to take the possibility of further hikes off the table.”
The last part about keeping rate hikes on the table is just obligatory caution that in name keeps the Fed’s options open just in case.The next question came from Governor Chris Waller’s claim that the Fed could be cutting rates in the next several months if inflation continued to fall. Powell of course did not respond directly to the commentary, but he affirmed that the Fed has its mind on rate cuts for 2024:
“…the other question of when will it become appropriate to begin dialing back the amount of policy restraint in place that begins to come into view and is clearly a topic of discussion out in the world and and also a discussion for us at our meeting today.”
Note Powell conditioned his remarks to say that “no one is declaring victory, that would be premature.” But again, this is obligatory caution. Victory is practically oozing out of every pore of this meeting. The Fed has to take small and methodical steps in its march to victory.
Inflation Is DeadPowell’s most revealing answer came to a question about what motivates the Fed to consider rate cuts:
“Both headline and core [inflation] have come down really significantly in three months, that’s a big piece of this. At the same time growth has turned out to be very strong in the third quarter is slowing we believe as appropriate, and we’ve got we’ve had several labor market reports which suggest again significant progress toward greater balance across a very a broad range of indicators. You’re seeing so many of the indicators come back to normal.”
Importantly, Powell noted later in the Q&A that the Fed has seen progress in the most worrisome component of the inflation basket: non-housing services. Now, all three components of core inflation are contributing to inflation’s demise.Powell further stated that a rate hike is no longer the base case unlike 60 or 90 days ago. He pointed to individual board members who have assessments about the timing for reducing tight policy when saying “That is a discussion we’ll be having going forward.”Notably, while Powell insisted the job remains to get inflation down to 2%, he acknowledged in response to a reminder about statements in July that the Fed cannot wait until 2% inflation to start cutting rates:
“The reason you wouldn’t wait to get the 2% to cut rates is that policy would be it would be too late. You’d want to be reducing restriction on the economy well before 2% so you don’t overshoot…you know it takes a while for policy to get into the economy and affect inflation.”
Financial Markets Are Ready for Rate Cuts Sooner Than Later
At one point recently, financial markets pessimistically rolled back the first rate cut to September 2024. Going into this meeting, the market planted the flag on a March rate cut but retreated the day before in the wake of November CPI data. At the time of writing, the first rate cut is firmly rooted in March (source: CME FedWatch) – follow the blue colored boxes for the most likely scenario for a given interest rate policy (labeled across the top of the chart) and a given meeting date (labeled across the left side of the chart). The comparison chart below shows how the odds for a March rate cut were 39.7% yesterday but 54% a week ago. A month ago the odds were a mere 10.5%. Market opinion has changed rapidly!
In the end, Inflation Watch will stay on the case. The situation remains uncertain and the citizenry is still not happy about prices. Powell admitted as much:
“The price level is not coming down…so people are still living with high prices and that’s something people don’t like. Real wages are now positive so that wages are now moving up more than inflation. As inflation comes down that might help improve the mood of people.”
So while the Fed keeps working, and wages keep trying to outpace inflation, Inflation Watch will keep on watching and reporting!In the meantime, see below the dramatic impact of the Fed’s declaration of victory on the U.S. dollar (DXY); the recent downtrend looks ready to resume (source: TradingVIew.com). More By This Author:Another Shot For The Turkish Lira After Big Rate Hike And Record Reserves
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