FOMC Statement and Powell’s Press Conference
May 1, 2024
The FOMC statement includes two changes compared to the prior March 20th statement. An added sentence to the first paragraph reads,
In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.
This comment follows the repeated remark that “inflation has eased over the past years but remains elevated” and merely states the obvious continuation of higher than hoped price pressure. At the March press conference, Powell had clarified the inclination to neither over-react to the January-February price data nor dismiss the development.
The second modification is also unsurprising and involves a slowdown in the rate of balance sheet runoff. Around $1.5 trillion has already been run down by capping the amount of reinvested maturing treasuries and mortgage-backed debt. The monthly runoff pace of Treasuries will be sliced almost in half to $35 billion starting next month, which has been the pace for the agency debt. That pace is not being changed, but its reinvested principal will be henceforth diverted to Treasuries. Investors had been led already to expect this announcement before long, and in any case officials had previously indicated that the interest rate remains the primary tool for changes in monetary policy. Officials have implied that the ultimate contraction of the balance sheet is now about halfway completed and that slowing the speed toward that goal will guard against disrupting markets and ultimately foster a deeper runoff.
Chairman Powell’s Press Conference
My over-riding takeaway from the press conference is the real possibility of no cuts being made in the federal funds rate target this year and an even likelier chance that the first reduction happens at the final meeting in December. In response to repeated questions along similar lines, Powell avoided solicitations regarding what it will take for the FOMC to become sufficiently confident that the current restrictive stance is going to achieve 2% inflation by 2025, saying only that it has become apparent that it will take longer than officials had imagined earlier. Previous dot plot depictions of individual interest rate forecasts had suggested a total of 75 basis points of easing during this year.
For me, the hint that a first cut may not happen perhaps before the December meeting wasn’t merely Powell’s avoidance of hypothetical questions. He cited a difference between thinking when January and February price data were disappointing and now when there’s a whole quarter with a lack of additional progress toward the 2% price target. Even if inflation were to cool significantly in coming months, by that standard it would probably take at least until the September meeting at minimum to offset the string of disappointing reports in the early going of 2024. Last December, officials were looking for reasons to be more confident than they felt then, which suggests that if second quarter data cooperate, they will want to see a month or two more of data further extending the path to the 2% goal. I’m also worried about a rarely mentioned way of zeroing in on the latest momentum of the inflationary process, which is to look at three-month price changes expressed in annualized terms. Back in 2023, the annualized PCE price deflator climbed at a 2.5% rate in the second quarter, then 2.6% in 3Q, 1.8% in 4Q but 3.4% in the first quarter of 2024.
The more telling core PCE deflator that filters out food and energy went from 5.0% in the first quarter of 2023 to 3.7% in the second quarter and 2.0% in each quarter of the second half of last year before jumping back to 3.7% in the first quarter of this year. From this perspective, the Fed’s goal had in fact been achieved fully but for just two quarters, not enough to convince FOMC members of its sustainability. So they decided to see if a third consecutive quarter of inflation at, or at least near to, 2% would happen. It didn’t, and at 3.7% was back into clearly unsatisfactory territory. Given that setback, a move back to 2-something percent in this year’s second quarter’s annualized core PCE inflation would still leave reasonable doubt in confidence in fully achieving the inflation mandate.
Powell didn’t spell out the exact reasons why the committee feels that policy is sufficiently restrictive to finish the job other than the fact that so much progress was achieved initially and that time is all that may be lacking to complete the mission. He often underscored the uncertainty surrounding the outlook, which is another way of conceding that the future holds many plausible scenarios and that assigning probabilities to each is simply not feasible. Amid this ambiguity, he had to field some questions regarding whether the next rate change might have to be a hike, and his responses to such seemed a bit awkward. In picking his words carefully, it suggested that even if the next rate change is a cut, it’s not far-fetched to think it might get delayed until December or later.
Finally, Fed officials are being too short-sighted to exclude politics from the holistic approach to achieving price stability. Candidate Trump hopes to clip some of the Fed’s institutional independence, wants another big tax cut that will make fiscal deficit containment harder to do, favors increasing import tariffs that would increase prices on a wide range of goods, and also favors the deportation of undocumented immigrants that would crimp labor supply. If the goal is sustainable price stability, it seems monetary officials ought to pay some attention to the future beyond the next 12-18 months.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary broadcast without express permission.
Tags: FOMC statement
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