Rate Cuts: Fed Talks With Many Voices

Powell"s Cheerleading in December Remains A Problem

The Federal Reserve’s favorite price measure, the Personal Consumption Expenditure index, was released for the month of January by the US Bureau of Economic Analysis (BEA) on Thursday, and was elevated as expected. However, both Treasury and equity holders were relieved that the figures were not as bad as had been feared — the year-on-year calculations for both headline and core inflation showed a slight decline from December.

The warning signals for the Fed and investors were contained in the month-to-month estimates — an acceleration from 0.1% to 0.3% in the case of the headline measure, and from 0.1% to 0.4% in the case of core inflation (which excludes food and energy). The month-to-month core inflation rate was the highest since February 2023. These are the figures that will likely cause Fed officials to deviate even more from Chairman Jerome Powell’s suggestion at the press conference in December that markets should expect rate cuts starting soon.

But they were not sufficient to make the various decision makers speak with one voice in providing guidance. John Williams, President of the Federal Reserve Bank of New York, repeatedly emphasized the importance of achieving the central bank’s 2% inflation goal. Speaking in Garden City, New York on Wednesday, he said that “we still have a ways to go on the journey to sustained 2% inflation.” He repeated the message Thursday, suggesting that rate cuts should be expected “later this year.”

Atlanta Fed President Raphael Bostic does not believe that Thursday’s PCE inflation numbers are a serious threat to the Fed achieving its inflation target. “There are going to be bumps along the way,” he opined, speaking after going over the latest data. Consequently, “I expect to see us start to reduce rates in the summertime.”

Does the Fed think that inflation is still a threat or not? Should rates be cut in summer or only later in the year? If you are scratching your head trying to make sense out of conflicting statements by Fed officials during the same week, join the bandwagon. The alternative with policy makers providing a clear message on policy direction is not going to happen!

A significant factor in the different views is the immensity of stimulus still present in the US economy. The fiscal spigot has been turned on in an election year after the collective $2.8 trillion of subsidies and spending in the final months of the Trump administration and the initial months of the Biden administration. The Federal Reserve’s balance sheet is still running at a level 85% larger than at the start of covid. The consequences include both rapid gross domestic product (GDP) expansion — 3.2% in the final quarter of 2023 according to the BEA, and 2.1% in the current quarter according to the Atlanta Fed’s GDPNow estimate — and stubborn inflation.

Powell also contributed to making the task of providing guidance to investors more difficult. Rather than express cautious optimism about inflation’s progress, he served as a cheerleader for markets after the December meeting of the Federal Open Market Committee by suggesting that rate cuts were at hand, and would occur fairly quickly. The rally in Treasurys and equities that followed after the press conference put more money in investors’ wallets and placed the Fed’s inflation goal even further beyond reach.

Recent developments put the Chairman in a Catch-22 situation when it comes to his much awaited press conference on March 20. Should he provide an extremely tough message that the Fed will wait much longer to cut rates, thereby strengthening his credentials as an inflation fighter but increasing the risk of pushing the economy into recession? Or should he try to forestall a recession by indicating that the first rate cut will occur following one of the next two FOMC meetings, on May 1 or June 12? This would likely result in a market rally and make inflation mitigation more difficult.

Why does the Fed find itself in this double bind? It goes back to the assumption that Powell made that the pick up in inflation would be “transitory,” permitting the Federal Reserve to double its balance sheet between early 2020 and early 2022, and maintain near-zero interest rates. All this in the presence of massive fiscal stimulus that had been introduced to fight covid.

Jerome Powell, the first Fed Chairman since G. William Miller (1978 - 1979) not to have a formal economics education, is likely to find out that there is no such thing as a free lunch!

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

March 2, 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