Powell Pivots: Yet Again

June Rate Cut at Risk

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Federal Reserve Chairman Jerome Powell starts almost every press conference after Federal Open Market Committee rate decisions by expressing his deep concern for the pain endured by families due to high inflation. You may get emotional just watching him! But none of that prevented him from providing indications on March 20 that rate cuts were coming despite inflation remaining above target. The release yesterday of figures relating to the Personal Consumption Expenditures price index, the Fed’s favorite, put the Chairman back in a familiar spot — hedging his bets and making another pivot.

First, details on the data. The headline PCE index rose by 2.5% last month from a year earlier, accelerating from 2.4% in January. The month-on-month change in the core index (which excludes food and energy) rose by 0.3%, faster than the pace in October, November or December. Especially notable was the revision in figures published by the US Bureau of Economic Analysis. PCE inflation measures for December and January were moved upward, signaling that inflation was worse than had been first estimated. For instance, the core index change was revised to 0.5% in January, up from an already elevated 0.4% reported earlier. To understand the magnitude of the acceleration in inflation, it is important to recall that the monthly core inflation rates were 0.1% each in October and November, and 0.2% in December.

What was the Chairman’s reaction? Speaking yesterday at a conference organized by the Federal Reserve Bank of San Francisco shortly after the publication of the statistics, he said that “it's not as low as most of the good readings we got in the second half of last year. But it's definitely more along the lines of what we want to see.” He suggested repeatedly that it would likely not be appropriate “that we would begin to reduce interest rates until the Federal Open Market Committee is confident that inflation is moving down to 2% on a sustained basis.” For additional emphasis, he stated that the Fed would not start cutting rates until it was sure that the inflation target was within reach.

The tone of yesterday’s interview with Kai Ryssdal of Marketplace was, therefore, different from his post-FOMC press conference just nine days earlier. On March 20, he went along with the collective FOMC view that there would be three rate cuts before the end of the year, and made the forecast despite a sharp pick up in various inflation measures during the first two months of 2024.

What changed?

With various signals from the latest PCE release (which Powell had received the day before the official release) suggesting that the pickup in inflation was not just a quirky January phenomenon, it may have become untenable for the Chairman to signal policy easing starting in June. He may have been forced by yesterday’s data — after all, he repeatedly refers to the central bank as a “data-dependent Fed” — to inject some uncertainty regarding the proximity of lower interest rates. That prompted the latest pivot.

With the Chairman on a delicate balance between first suggesting, and subsequently cautioning against, quick rate cuts, minding the store on inflation mitigation as a full-time job was left to Fed Governor Christopher Waller. In a speech aptly titled “There’s Still No Rush” that he gave at the Economic Club of New York on Wednesday, he noted that inflation “readings in the past two months have been disappointing.” He pointed out that the three-month core consumer price index inflation was running at 3.3% in December but accelerated, massively, to 4.2% in February. Furthermore, he said, six-month core CPI inflation, also 3.3% in December, surged to 3.9% last month.

Waller’s conclusion: “It is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data.”

A March 20 rate cut had been considered a shoo-in a few months ago. Attention subsequently switched to a June cut which became the consensus. Now, Chairman Powell’s latest pivot and Governor Waller’s caution calls that also into question.

What do the developments mean for fixed income markets? With the confusing and contradictory public views by Federal Reserve officials, investors have to depend on one or both of the following factors to bring about the first rate cut they yearn for — a credit event or election-year policymaking.

Hardly an efficient way to implement policy!

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

March 30, 2024

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities.  Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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