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Fed, Powell Lay Out Inflation Expectations

Wednesday, June 12th, 2024

This trading session was, in some ways, the story of two shoes dropping. The first, ahead of today’s open, was the Consumer Price Index (CPI) for May, which came in better than expected: 0.0% month over month (decidedly not inflationary), and +3.3% on the year-over-year Inflation Rate: 20 basis points (bps) below the April tally. The second shoe to drop is the latest Federal Open Market Committee (FOMC) meeting the afternoon, where the Fed unsurprisingly kept interest rates unchanged from the 5.25-5.50% level we’ve had since last summer.

The Fed sees economic activity continuing at a solid pace. Job gains are still considered strong. Progress on inflation has been made, albeit modestly. The committee maintains its +2% inflation objective, and says it sees a better balance on inflation metrics than a year ago — largely due to restrictive interest rate policy. In 2022, the Fed raised rates +425 bps, and another +100 bps in 2023. We’re still awaiting the first move of 2024, obviously.

The Fed continues to remark that the economic outlook is still uncertain. It still says it won’t start cutting interest rates until inflation moves more “sustainably” toward +2%. In today’s statement, the monetary policy body also said it would make adjustments to current policy if new economic risks emerge. You might read this as, “We’re going to keep everything tight for now, but if something breaks, we will respond.”

In the press conference directly following the FOMC release, Fed Chair Powell articulated these positions. He began by once again saying the body only makes decisions meeting by meeting, and are not going to get ahead of themselves — least of all in speculating on what month rates might finally start coming down. We’re “very data dependent,” Powell said. “We saw today’s CPI report as progress and building confidence, but it does not warrant changing policy at this time.”

The Fed’s favored inflation metric is the PCE report, which comes out at the end of this month. PCE stands for Personal Consumption Expenditures, of course, and the +2.7% reported for April he said “is a good place to be.” Powell said that no one on the committee has any interest rate hikes as their base-case scenario, going forward. “It’s pretty clear policy is restrictive and having the effects we’d hoped for.”

The main sticking point for Powell, and presumably the rest of the Fed, is the relative ambiguity of falling inflation rates. He noted that the labor force supply has come up “quite a bit,” with both job openings and quits coming down. Unemployment has elevated 60 bps over the past year — and this remains consistent with the “soft landing” scenario the Fed has been attempting to conjure for more than two years now. “We’re getting good results here,” Powell said. “It’s just gonna happen more slowly than we thought.”

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