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FED: Copy - Is March “Live” For A Cut? Or Echoes Of Powell In Jan 2024? (1/2)

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Is March “live” for a cut? To be sure, Powell probably will repeat what he said in December when asked about the possibility of the next move being a hike (“you don’t rule things completely in or out in this world. That doesn’t appear to be a likely outcome”). That said, the “base case” is still for a couple of cuts this year for most FOMC participants, barring further evidence that disinflation is stalling out. 

  • The most senior members of the FOMC have conveyed a dovish perspective on recent data, and don’t appear to be concerned with cutting rates further even if the labor market is not softening as had been feared just a few months ago. Gov Waller has been the most prominent doves on the Committee, seeing potential for 3-4 cuts this year, and possibly restarting the easing cycle earlier than market pricing implies.
  • Inflation is once again the Fed’s focus at this point and the recent stabilization in the unemployment rate is seen against the broader context of labor conditions being roughly on a par with pre-pandemic levels, which ran alongside 2% inflation. While of course inflation remaining stubbornly elevated would keep cuts on the back burner, Waller and others (including Powell) appear to remain convinced that inflation is still on a path to the 2% target, even if it will take a little longer than previously envisaged. A solid labor market is a feature, not a bug, for senior Fed leadership – and is not incompatible, in their view, with inflation coming down and delivering rate cuts that get policy closer to neutral.
  • Additionally, Powell probably won’t completely rule out another cut as soon as the next meeting in March, while being careful to couch any future moves as data- and outlook- dependent, and emphasizing that the Fed can afford to be patient so long as the economy and labor market remain solid.
  • This could prove to be an echo of the January 2024 meeting, when Powell set a high bar to starting the easing cycle at the next meeting in March (“I would say, it is probably not the most likely case, or what we would call the base case”), and markets reacted hawkishly given that they were 50/50 priced for a March cut.
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Is March “live” for a cut? To be sure, Powell probably will repeat what he said in December when asked about the possibility of the next move being a hike (“you don’t rule things completely in or out in this world. That doesn’t appear to be a likely outcome”). That said, the “base case” is still for a couple of cuts this year for most FOMC participants, barring further evidence that disinflation is stalling out. 

  • The most senior members of the FOMC have conveyed a dovish perspective on recent data, and don’t appear to be concerned with cutting rates further even if the labor market is not softening as had been feared just a few months ago. Gov Waller has been the most prominent doves on the Committee, seeing potential for 3-4 cuts this year, and possibly restarting the easing cycle earlier than market pricing implies.
  • Inflation is once again the Fed’s focus at this point and the recent stabilization in the unemployment rate is seen against the broader context of labor conditions being roughly on a par with pre-pandemic levels, which ran alongside 2% inflation. While of course inflation remaining stubbornly elevated would keep cuts on the back burner, Waller and others (including Powell) appear to remain convinced that inflation is still on a path to the 2% target, even if it will take a little longer than previously envisaged. A solid labor market is a feature, not a bug, for senior Fed leadership – and is not incompatible, in their view, with inflation coming down and delivering rate cuts that get policy closer to neutral.
  • Additionally, Powell probably won’t completely rule out another cut as soon as the next meeting in March, while being careful to couch any future moves as data- and outlook- dependent, and emphasizing that the Fed can afford to be patient so long as the economy and labor market remain solid.
  • This could prove to be an echo of the January 2024 meeting, when Powell set a high bar to starting the easing cycle at the next meeting in March (“I would say, it is probably not the most likely case, or what we would call the base case”), and markets reacted hawkishly given that they were 50/50 priced for a March cut.