Perspective: Fed’s Rate Decision and Powell’s Press Conference
March 22, 2024
Fed Chair Powell clarified decision to maintain steady federal-funds rate, set conditions for future rate cuts. Photo: FOMC.
The Fed wants to cut rates but the economic data isn’t letting them.
Inflation appears to be stubbornly persistent in the U.S, and possibly even stalling. In my view, the labour market is at the core of this issue. Service-related CPI components, particularly driven by shelter costs, continue to remain elevated, despite other components decreasing. This trend poses a challenge for the Fed as they strive to achieve their 2% target, especially given the spending behaviour of the American consumer in a strong labour market.
February’s (m/m) U.S unemployment rate was 3.9%, still below the natural rate of unemployment of about 4.4% (projected for Q1 2024) and has remained below the 4% range for 26 months straight so far. To add fuel to the fire, workers have experienced income gains, and the American consumer is spending it. Total private U.S. average hourly earnings have been rising year-over-year, with 5.3% in 2022, 4.7% in 2023, and 4.3% for 2024, for the 12-month period ending in February. Personal consumption expenditures (excluding food and energy) are also projected to rise by 2.6% by year-end, compared to 2.4% projected in December 2023.
Despite Federal Reserve Chair Powell's acknowledgment that a robust labor market wouldn't dissuade them from lowering rates, there are clear risks associated with both premature and delayed rate cuts.
Testing the bond market’s patience and possibility of reigniting inflation
While bond markets currently accept the Fed’s patient approach, we can’t discount the fact we’re getting stuck at around 3% inflation. Fundamentally, where should the 10-year note be? Currently, given where yields are, markets anticipate 2% inflation in combination with economic growth. The concern arises if markets are no longer accepting of the Fed’s rate cutting timeline. Furthermore, if we then see a drastic fall in the dollar, that may reverse some of the disinflation on the goods side. Can markets continue being patient with the Fed?
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