2nd  February 2024

 “Implicitly, we do have confidence… but we want to get greater confidence”

Another FOMC presser come and gone and this week, there’s no doubt that Powell and friends intend to cut. Granted, Powell rejected the mechanical characterisation of “adjustment cuts”, saying that higher real rates coming from dropping inflation “doesn’t mean we can mechanically adjust policy”. Sure, right, noted. Being cynical, some part of us wondered if this has anything to do with worries about the threat AI poses to high wage, high status careers like Doctor, Lawyer or FOMC governor. But with rate cuts now the assumed state of play, the question of when takes center stage. To that end, Powell pushed back against the market’s pricing in of cuts at the next meeting in March, saying “that’s probably not the most likely case or what we would call the base case”. The shockingly strong NFP data served as a mic drop for the prospects of an early rate cut.

Still, as the price action immediately after Powell demonstrated, having been introduced to the concept of adjustment cuts, the market is not going to let go of the idea easily. Unruffled by Powell, rates market moved to price in a slightly less than 40% chance of cuts the next time the FOMC convened, as opposed to the slightly greater than 50% chance it had seen before the chair’s comments. Stocks meanwhile “tumbled” over 2% in response, only to recover most of the lost ground the day after. Traders seemed confident in calling Powell’s bluff. Right up to the point that the NFP data demonstrated that hubris is inevitably followed by nemesis.

Importantly, and turning to the why behind Powell’s lack of conviction on looming cuts, the chair said bluntly that the committee lacks the confidence to be sure that inflation is now “on a sustainable path down to 2 percent”. Ignore that “on a three-month basis, core PCE has been running at 1.5 percent… [and] at 1.9 percent over the past six months”, the “six good months of inflation data” and Powell’s having “pledged to cut rates before inflation reached 2 percent” (all of which were brought up by members of the press during the press conference). Instead, Powell said that given “it’s a highly consequential decision to start the process of dialing back on restriction”, “we’re trying to get comfortable and gain confidence that inflation is on a sustainable path down to 2 percent or toward 2 percent.” Roger, loud and clear. No risk of hubris here.


P.S. The QRA was seemingly a nothingburger, but the failure of New York Community Bancorp has a few people worried about history repeating itself and spreading trouble (1.2 trillion of losses!) from the CRE dumpster fire.