MNI FED WATCH: On Track To Cautiously Lower Rates This Year

The Federal Reserve remains on track to lower its benchmark interest rate this year despite bumps on the road to disinflation to start the year, while QT won't end but the pace of run-offs will slow soon, Chair Jerome Powell said Wednesday.

The FOMC concluded its March meeting by holding rates at a 23-year high for the fifth meeting in a row and reaffirming it will not lower rates until it has gained confidence that inflation is moving sustainably toward 2%.

After seven months of favorable inflation data last year, the FOMC won't overreact to higher-than-expected price increases in January and February, Powell said.

"I don't think we really know if this is a bump on the road or more. We will have to find out," Powell said. "In the meantime, the economy is strong, inflation has come way down and that gives us the ability to evaluate this question carefully."

"We believe that our policy rate is likely at its peak for this time in the cycle and if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," he said.

Stocks surged to all time highs and odds for a first rate cut in June rose to over 80% after Powell's remarks and the release of projections showing the median expectation for rate cuts among 19 officials stayed at three this year, rather than moving down to two as some investors had anticipated.

TWO-SIDED RISKS

Powell did not explicitly rule out making the first cut at the next FOMC meeting in May when asked, saying only that the strength of the economy and the labor market allows for some room to "let the data speak."

"We make decisions meeting by meeting. We didn't make any decisions about future meetings today," he said. (See: MNI INTERVIEW: Fed Set For June Cut, Risks Later Move-Sheets)

Unexpected weakening in the labor market could bring forward rate cuts, he said, but added he saw no sign of that at the moment. "You're seeing high job growth. You're seeing big increases in supply. You're seeing strong wage growth but wage growth is moderating down to more sustainable levels," he said. "The overall picture is a strong labor market. The extreme imbalances we saw in the early parts of the pandemic recovery have mostly been resolved."

The FOMC is balancing risks on both sides, the Fed chair said. "We're in a situation where if we ease too much or too soon, we could see inflation come back. If we ease too late, we can do unnecessary harm to employment and people's working lives."

TAPERING QT SOON

After a formal discussion on balance sheet policy at the March meeting, the FOMC generally agreed to slow the pace of balance sheet runoff "fairly soon" so as to avoid unnecessary frictions in money markets, Powell said.

A slower pace of runoff will hopefully enable QT to continue for longer, he said. "The idea is that with a smoother transition, you'll run much less risk of kind of liquidity problems which can grow into shocks and cause you to drop the process prematurely."

The Fed will be monitoring market variables for signals on whether it's approaching an "ample" level of reserves for the banking system, Powell said. "There is not a dollar amount or percent of GDP," he said.

The Fed ended QT in 2019 after repo market turmoil and officials are currently preparing to slow the pace of runoffs to avoid a repeat of that experience. (See MNI: Fed Could Soon Taper QT But Halt Further Out - Staffers)