"Rate Cuts, Come What May!"

Neither Strong Job Market Nor High Inflation Will Deter Fed

The title could be an apt summation of Federal Reserve Chairman Jerome Powell’s views at the press conference on Wednesday. While the decision by the Federal Open Market Committee not to cut rates this month may, by itself, have been considered a hawkish development, Powell more than undid the impact of the decision by saying in so many different ways that rate cuts are coming. Neither the upturn in various measures of US inflation since the beginning of the year, nor the continued strong wage growth, deterred the Chairman from providing an über-dovish message.

He and the FOMC suggested the likelihood of three rate cuts this year even as the FOMC increased the economy’s forecast growth this year to 2.1%. The promised rate cuts come after the Fed’s favorite inflation measure, the core Personal Consumer Expenditure price index (which excludes food and energy) showed the monthly rise to have surged to 0.4% in January from 0.1% in November and again in December. The market consensus for the February figure to be released on March 29 is still above the 0.1%.

In the early part of his prepared text, Powell acknowledged that “inflation is still too high, ongoing progress in bringing it down is not assured, and the path forward is uncertain.” Yet, he suggested during the Q&A session that despite the uptick in various inflation indicators during January and February, he looked for “inflation coming down gradually toward two percent on a sometimes bumpy path.” How could he and his colleagues on the FOMC feel confident that the past two months’ data were just a “bump” on the road and not a turn to persistently higher inflation? They cannot feel sure, of course, and had yet forecast the rate cuts planned for the rest of 2024.

Answering other questions, he said that strong hiring by itself would not stop the Fed from cutting rates. But he also told Nancy Marshall-Genzer of Marketplace that “to get inflation back down to two percent sustainably, we’d like to see . . . wage increases . . . back down to levels that are more sustainable over time.” Average hourly earnings rose by 4.3% in February from a year earlier, clearly too high to have a 2% inflation rate. No explanation for the seeming contradiction.

That brings us back to a question I raised in SriKonomics earlier this month — where is the hurry to suggest rate cuts before there is a high degree of confidence that inflation will indeed get to the 2% target? While the Chairman said at this press conference that continuation of an extremely tight policy could unnecessarily increase unemployment, a resurgence in inflation would call for even tougher monetary measures, eventually worsening the employment situation.

There are two possible explanations for Powell’s eagerness in suggesting policy easing. One may have been his fear — repeatedly expressed in SriKonomics columns — that the regional banking problems of a year ago could be followed by an even more serious financial crisis unless a rate reduction is signaled. The Chairman fielded a question on whether the slowing of Quantitative Tightening that is being discussed is because the Fed feared a repeat of banking issues.

Second, this is an election year. Powell got a nudge from President Joe Biden who said at a campaign rally in Philadelphia on March 8, “I bet — you betcha — those rates come down more, because I bet you that that little outfit that sets interest rates, it’s going to come down.” Despite Powell’s repeated protestations that the Fed is an apolitical entity, he cannot be unaware that his term as Chairman ends on May 15, 2026, and that the winner of the November presidential elections will decide on his renomination.

The impact of the Powell speech on markets was huge. All major US equity indexes hit records on Wednesday and Thursday, and yields on 10- and two-year Treasurys plunged. The spread between two- and 10-year Treasurys widened from -42 basis points at the start of the week to -39 basis points last night. The reduced negative figure implies a steepening of the yield curve reflecting market expectations of an approaching rate cut.

What next? Expect this week’s rally in equities and Treasurys to put more money in consumer wallets and enhance their spending power. This is the opposite of what the Federal Reserve should hope for if inflation mitigation is its goal.

As I have said repeatedly in these columns, there is no such thing as a free lunch — not even in an election year!

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

March 23, 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.

This publication is for information purposes only. Past performance is no guarantee of future results. While the information and statistical data contained herein are based on sources believed to be reliable, we do not represent that it is accurate and should not be relied on as such or be the basis for an investment decision. Any opinions expressed are current only as of the time made and are subject to change without notice. Sri-Kumar Global Strategies, Inc. assumes no duty to update any such statements. Any holdings of a particular company or security discussed herein are under periodic review by the author and are subject to change at any time, without notice. This report may include estimates, projections and other "forward-looking statements." Due to numerous factors, actual events may differ substantially from those presented. This publication is not to be used or considered as an offer to sell, or a solicitation to an offer to buy, any security. Nothing contained herein should be considered a recommendation or advice to purchase or sell any security. Sri-Kumar Global Strategies, Inc., or its employees or clients may have positions in securities or investments mentioned in this publication, which positions may change at any time without notice. ©Copyright 2024 --  Sri-Kumar Global Strategies, Inc., 312 Arizona Avenue, Santa Monica, California 90401; Telephone: +1-310-455-6071