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MarketScape · 02.01.24

Looking for Greater Confidence

Fed Chair Jay Powell used his press conference this week to push against market expectations that rate cuts are just around the corner.
  • Markets & Economy
  • Liquidity
  • Central Banks
  • Monetary Policy
Key Points
What it is
We unpack the Fed’s latest policy statement that the market was too optimistic on the prospects of a rate cut as soon as the March FOMC meeting.
Why it matters
Chair Powell acknowledged the need to balance the risks of cutting rates too soon against the risks of waiting too long but noted that the FOMC still needs to see further progress on disinflation.
Where it's going
The Chair’s own words this week suggest that investors keen on the future direction of interest rates would do well to focus on inflation in the services sector.

Fed Chair Jay Powell used his press conference this week to push against market expectations that rate cuts are just around the corner. His point was consistent with our own view that the market was too optimistic on the prospects of a rate cut at the March Federal Open Market Committee meeting, also known as the  meeting.  He acknowledged the need to balance the risks of cutting rates too soon against the risks of waiting too long.  But he noted that the FOMC still needs to see further progress on disinflation. Let’s take a closer look.  

 

The Chair struck a relatively upbeat tone on the economy.  He characterized growth as “solid to strong over the course of last year” and noted that the labor market is “at or nearing normal.”  And yet, he said, “inflation has eased notably over the past year,” particularly over the past six months.  But Powell cautioned that these data are not enough to give the Committee the confidence it needs to start .  He came back to this confidence theme several times, and went as far as to say that he doesn’t think the FOMC have enough confidence to cut rates by the March meeting.

 

Powell was pressed several times about what it would take for the Committee to gain the confidence it needs to start cutting rates.  A reporter even asked how many more months of good inflation data the Committee needed.  Not surprisingly, Powell refrained from tying the Committee’s decision to the calendar.  But he did address the issue elsewhere in his remarks.  For instance, he hinted on the possibility that the good data on inflation thus far could be mostly the result of “one-off factors.” More telling, in our view, was his remark that a large portion of the good news on inflation has come from goods deflation.  Powell added that a “reasonable assumption” going forward is that the contribution from falling goods prices will “flatten out,” leaving it up to disinflation in the services sectors to “contribute more” to the process of bringing overall inflation down to 2 percent on a sustained basis.

 

With relatively good news on economic activity, and with inflation still running above the FOMC’s target, it’s no surprise that inflation remains the key data to watch.  But the Chair’s own words this week suggest that investors keen on the future direction of interest rates would do well to focus on inflation in the services sector, which, compared to inflation in the goods sector, has thus far not been as helpful to the overall disinflationary progress.

Main Point

Inflation Remains the Key Data to Watch

With relatively good news on economic activity, and with inflation still running above the FOMC’s target, it’s no surprise that inflation remains the key data to watch.

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Antulio N. Bomfim

Head of Global Macro – Global Fixed Income

Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.

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