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May 2024 FOMC Debrief

发布时间 2024-05-02 04:54:39    来源


federalreserve Modestly dovish.



Hello my friends, today is May 1st and this is my May FOMC debrief. Now before we get into what happened today, let's level set a little bit. So the Fed targets 2% inflation and their favorite inflation measure is Core PCE. Now in the second half of 2023, Core PCE was bing on at 2% for 6 months. The Fed was feeling pretty good then, so in December, it signaled that it was open to cutting rates in 2024. Now in 2024, we got higher than expected inflation prints in January and February. When Chair Powell was asked about this in March, he basically shrugged and said, you know, this is probably seasonal.

Now though, we got inflation prints for March and they continued to be higher than expected. At this point in time, Chair Powell strongly signaled that he was not happy with progress on inflation and he was going to hold rates higher for longer. Now in response to this pivot, the market had priced out a lot of cuts. In January, the market was pricing in as many as 7 cuts this year. Heading into the Fed meeting today, the market was only pricing in about 1.5 cuts. So everyone was keen to see what Chair Powell would say about the data and also keen to find out more about their QUT tapering plans. In the minutes and at the last FOMC press conference, Chair Powell had basically hinted that the QUT taper was imminent.

Okay, so that brings us to today. So I thought today's FOMC conference was modestly dovish. Now it was modestly dovish for a couple reasons. First, when it comes to QUT, QUT was the QUT taper was more than expected. So right now, the Fed is letting about $60 billion in Treasuries run off in a maximum of $35 billion a month in mortgage MBS run off. So everyone knows that they're not going to do anything with mortgages, that's really nothing to think about. What everyone was expecting though was for the $60 billion a month in Treasuries run off to be cut in half to $30 billion a month. But instead, the Fed basically surprised everyone and cut run off to $25 billion a month.

Now the Fed obviously knows that the market is expecting $30 billion a month, but they gave them $25 million. So it was calibrated to be supportive of the bond market. And on that sense, it was dovish. And you can see that the bond market did react positively. Now the second reason why Terpaul was, I think, modestly dovish is that he was strongly strongly telling everyone that there wouldn't be any rate hikes anymore. And indeed, you really should never have expected any. But it seems from the press conference, there were many reporters asking Terpaul in many different ways whether or not he would hike rates again.

Now Terpaul, I mean, being a central banker, let's listen to what he said. So I think it's unlikely that the next policy rate move will be a hike. I'd say it's unlikely. Our policy focus is really what I just mentioned, which is how long to keep policy restrictive. Again, this is Terpaul as strongly as he can be telling everyone that, you know, the rate hikes are just not in the cars. Indeed, if you just step back and think about it, it should be obvious. So right now, inflation looks like it's about at 2.7%.
现在,让我们听听央行行长特保尔说的话。我认为下一次的政策利率调整可能不会是加息。我会说这种可能性很小。我们政策的重点真的是我刚才提到的,也就是要将政策保持 restrective 状态的时间有多长。特保尔强调指出,加息并不在计划中。实际上,如果你退后一步思考一下,这应该是显而易见的。目前,通货膨胀率看起来大约为2.7%。

Interest rates are about at 5.5%. You know, 2.7% is not that far from the Fed's target. It would seem strange to have actually 5.5% interest rates. Now if the Fed is not going to hike anymore, the next thing that everyone wants to know is when are they going to cut rates? So first off, we know that the Terpaul, as Terpaul has said, they are not happy with progress on inflation. So if they guided towards three cuts this year, now it's probably going to be less. Maybe two, maybe one. Now Terpaul told you his reaction function today. He says, let's actually let's listen to what he says.

I think there's also other paths that the economy could take, which would cause us to want to consider rate cuts. And those would be, two of those paths would be that we do gain greater confidence. As we've said, if that inflation is moving sustainably now, 2% or 2%, and another path could be an unexpected weakening in the labor market, for example. So those are paths in which you could see us cutting rates. So I think it really will depend on the data. Okay, basically, if you want rate cuts, there's one of two ways you can get it. First, you can have inflation basically come down, more and more progress on inflation towards the 2% target.

The other way you can get rate cuts is if unemployment rises. As we all know, the Fed has two mandates, full employment and price stability. Right now, the unemployment rate is around multi-decade lows. But if there are surprises to the upside of that, if we have a sudden or surprising deterioration in the labor market, then that would also prompt monetary easing.

Now we don't get our latest employment data until Friday, but over the past few months, the employment data has been stronger than expected in large part because there's been tremendous, tremendous amounts of migration into the US, and that's adding to the labor supply and that's boosting job growth. But also note though, that if hiring weakens and labor supply continues to increase, which it looks like it's going to, then the unemployment rate could also rise faster than expected.

Okay, so that's all I prepared for today. I'll be back on Saturday for Markets Weekly. Thanks for tuning in.