Final Thoughts on the FOMC Meeting

• With a bare data calendar, the market will turn to a pair of Fed speakers with Chicago Fed President Austin Goolsbee and NY Fed President John Williams offering their views today. Coming so soon after the FOMC meeting we doubt we’ll hear a strikingly different message from Powell’s on Wednesday, but they are two of the more dovish members, so we’ll at least get that faction’s view of things. In the meantime, the market steels itself for more DC tape bombs which, hopefully, will be few before the weekend. It’s another risk-off morning which is creating fresh Treasury bids. Currently, the 10yr Treasury is yielding 4.21%, down 2bps on the day, while the 2yr is yielding 3.94%, also down 2bps on the day.

 

• The FOMC decision from Wednesday kept with the expectation of two rate cuts in 2025 but significantly reduced expected GDP growth with an opposite increase in unemployment and inflation expectations. The Fed also moved to reduce QT by cutting the redemption level of Treasury securities from $25 billion per month to $5 billion, meaning the Fed will be buying $20 billion more in Treasuries per month before Wednesday’s meeting. That should provide marginally more support for Treasuries.

 

• One surprise we had from the meeting was the stable neutral rate at 3.00%, but the range of estimates remains wide, so it was perhaps more a matter of lucky math that the median estimate didn’t move at this meeting. With it being moved up an eighth of a percent at each of the last four quarter-end meetings, we suspect it will be adjusted upward in June, especially considering the uptick in inflation expectations, driven largely by proposed tariff policies. We anticipate it will finally reach 3.25% to 3.50%. That will functionally limit the amount of future rate cuts needed to bring policy back to neutral.

 

• The other surprise was Powell resurrecting the term “transitory”. We thought it had been banned from Fed Speak after the debacle in 21/22 characterizing the first uptick in post-lockdown inflation as transitory. Besides offering kudos to his therapist to get beyond the stigma, we think Powell wanted to make clear the Committee’s intent will be to look past any uptick in costs brought about by tariffs. Thus, it seems they are acknowledging that inflation will be sticky this year; thus, the increase in its year-end core PCE estimate from 2.5% to 2.8%. Despite that upward assessment on inflation, it won’t stop them from cutting rates if the economy falters. Thus, it seems the Fed is prioritizing growth over inflation, at least for the time being.

 

• Keeping two planned rate cuts in 2025, the early reduction in QT, and the declaration of looking past any tariff price increase had the market taking the meeting as a dovish event. That may be, but only to a certain extent. We will only add that when you study the rate forecast most members moved to a decidedly more hawkish view. In December, five members saw more than two rate cuts this year. In Wednesday’s update that was reduced to 2 members. In December, 4 members saw no rate cuts this year. In Wednesday’s update that doubled to 8 members. When assessing the economic outlook, however, members are much less certain now than they were in December. That’s expected as we’re all grappling with more uncertainty, but with Powell’s press conference comments the full employment mandate seems to have edged ahead in guiding policy for this year.

 

• One last thing from the meeting, Powell made it clear that weak “soft” data, like surveys of various kinds, will not be enough to shift policy. The Fed will need to see that soft survey data translate into “hard” results before acting. While soft data has been signaling coming weakness, it hasn’t showed clearly in the hard data. Sure, retail sales were weak in January and only mustered a modest rebound in February, but Powell made it clear they will need to see other hard data confirm a definite weakening trend. I can already hear the Fed skeptics proclaiming they’ll be late to the dance once again! The coming March payroll report will be the next big “hard” data event. In that regard, yesterday’s initial jobless claims, during payroll survey week, didn’t reveal new labor weakness.

 

• In the week ending March 15, the advance figure for seasonally adjusted initial claims was 223,000, an increase of 2,000 from the previous week’s revised level and just under 224,000. The previous week’s level was revised up by 1,000 from 220,000 to 221,000. The 4-week moving average was 227,000, an increase of 750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 226,000 to 226,250. The advance number for seasonally adjusted continuing claims during the week ending March 8 was 1,892,000, an increase of 33,000 from the previous week’s revised level. The previous week’s level was revised down by 11,000 from 1,870,000 to 1,859,000. The 4-week moving average was 1,875,750, an increase of 6,250 from the previous week’s revised average. The previous week’s average was revised down by 2,750 from 1,872,250 to 1,869,500.

 

• In all, it was a pretty benign report and one that reflects Powell’s comment Wednesday that we’re in a low-hire, low-fire labor market and this latest look at claims continues to reflect that. That fact that it was also during survey week for March payroll reporting implies a decent report may be in the offing.

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Updated Dot Plot – Still Expect 2 25bps Cuts This Year. Same as December’s Forecast

Source: Bloomberg

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Futures Still Point to June as a Possible Rate Cut Date

Source: CME