Fed meeting summary: dovish

At the conclusion of the Fed’s FOMC meeting today, the dot plot report (SEP) showed expectations for the Fed Funds rate (median) to stay at three cuts for 2024 but one fewer in 2025 (from the December 2023 projections.) While the average dot (simple) rose in all years, it was not as much as the market had priced in and the 2-year yield fell. Then, Jerome Powell’s press conference had a dovish tone. Three things stood out to me,

1. The recent higher inflation is being considered a bump in the road, not a trend. Powell said,

“But I would say the January number which was very high—the January CPI and PCE numbers were quite high. There’s reason to think that there could be seasonal effects there. But, nonetheless, we don’t want to be completely dismissive of it. The February number was high, higher than expectations, but we have it at currently well below 30 basis points core PCE, which is not terribly high. So it’s not like the January number.

But I take the two of them together and I think they haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road toward 2%. I don’t think that story has changed. I also don’t think that those readings added to anyone’s confidence that we’re moving closer to that point.”

2. Powell was dismissive of financial conditions being too loose (i.e., the stock market too high and/or interest rates too low). In response to a question of if financial conditions were too loose, he said,

“But ultimately, we do think that financial conditions are weighing on economic activity. And we think you see that. And a great place to see it as in the labor market where you’ve seen demand cooling off a little bit from the extremely high levels. And there I would point to job openings, quits, surveys, the hiring rate.”

and

“We did see progress on inflation last year, significant progress, despite, you know, financial conditions sometimes being tight or sometimes looser.” 

3. Despite the unemployment rate rising by 0.2% last month, Powell doesn’t see material weakness in the labor market (which somewhat contradicts what he said above.) In response to a question of if he sees “cracks” in the labor market, he said,

“So we, of course, monitor the—it’s one of our two goal variables—we all monitor the labor market very, very carefully. And I don’t see those cracks today. And we—you know, we follow all the possible stories that are out there about there being cracks. But the overall picture really is strong labor market, the extreme imbalances that we saw in the early parts of the pandemic recovery have mostly been resolved. You’re seeing high job growth. You’re seeing big increases in supply. You’re seeing strong wage growth, but wage growth is gradually moderating down to more sustainable levels.”

I was surprised at how dovish the Fed was. Given higher inflation and growth since the last meeting, it tells me they really want to cut rates before the economy weakens materially. I think they suspect a downturn/recession is ahead and are trying to pre-empt it.