Powell Prepares For "Bananas" Moment

Woody Allen Movie Showed The Way!

Federal Reserve Chairman Jerome Powell has a history of making grand declarations as part of his “Forward Guidance,” only to reverse himself and make a different statement, only to . . . You get the drift. The practice started with his expectation of the rise in inflation after covid being transitory, and went on to other pronouncements by 2022. Despite repeated statements by him and his colleagues that markets should expect a 50 basis point increase in rates in June that year, the Federal Open Market Committee raised the Federal Funds rate by 75bp. Powell tried to soften the blow to investors by suggesting that there would be only one more 75bp hike, but three such increases followed before 2022 ended.

The latest in the Chairman’s exercises in Forward Guidance was his suggestion at the post-FOMC press conference on December 13 that interest rates were likely at their peak and that the central bank had switched to considering when, and by how much, to cut rates. He has had to revert to the familiar pattern and reverse himself after consumer price inflation numbers for March surprised him and his colleagues on the upside. On April 16, he admitted that “the recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence.”

There was more disappointment for the Chairman, his colleagues on the FOMC, and the economy last week. Preliminary figures for gross domestic product in the first quarter showed that the Personal Consumption Expenditure price index rose by 3.4% over the past year, the fastest increase in several quarters, and an acceleration from 1.8% in the final quarter of 2023. The Fed’s inflation target, by comparison, is 2%.

There was also bad news on the price front yesterday. PCE inflation was 2.7% in March compared with a year ago, a data release by the US Bureau of Economic Analysis showed, posting the fastest increase since November. The core measure that excludes food and energy increased by 2.8%, belying expectations of a slowing to a 2.7% pace.

While the various senior Fed officials may return to their usual pattern of issuing contradictory public statements after the FOMC meeting takes place next Tuesday and Wednesday, they will no longer be able to suggest a quick rate cut as some have done until recently. What will be the implications for interest rates during the rest of 2024?

If the persistence of inflation prevents the FOMC from implementing a rate cut at its June, July or September meetings, the first opportunity to do so may come on November 7 — two days after the presidential elections. By then, the political imperative to reduce rates would have passed for both President Joe Biden, who forecast a rate cut at a press conference this month, and for Chairman Powell who may or may not be renominated by the next President.

If political considerations are removed from monetary policy making, I expect no rate cut during 2024 unless — you have heard me say this before — something within the system “breaks” due to elevated Treasury yields. In September 2008, September 2019, and March 2023, the Federal Reserve deviated significantly from announced policies to flood the market with liquidity in response to “emergency” situations.

How will the Chairman explain the outlook at his press conference next Wednesday? Journalists are sure to ask him when they can expect the first rate cut in light of the most recent inflation numbers. What will his response be? Even for Powell who has repeatedly cheerled markets, it would be difficult to put a positive spin on the current situation.

As an alternative, he may want to turn to the 1971 Woody Allen comedy, “Bananas,” for guidance. There is no better way to continue to provide forward guidance, be wrong on the guidance, and then walk away from it all!

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

April 27, 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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