MNI FED WATCH: Powell Leans Into Higher For Longer, Not Hikes

The Federal Reserve made clear Wednesday it is prepared to keep interest rates on hold for as long as needed as policymakers bemoaned a loss of momentum in the fight against inflation, although Fed Chair Jerome Powell deemed additional increases in borrowing costs unlikely.

The case for a series of cuts in 2024 weakened after three months of firmer-than-expected inflation data, Powell said. "We are prepared to maintain the current target range for the federal funds rate as long as appropriate," he said. "There are paths to not cutting. And there are paths to cutting. It's really going to depend on the data."

Fed officials Wednesday noted a lack of recent progress on inflation as they held rates steady at a 23-year high of 5.25-5.5% for a sixth straight meeting.

Powell said his confidence that inflation moves back down over the course of the year "is lower than it was" but dispelled speculation that interest rates are likely to move higher while keeping the option as a risk.

"Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected," he said. Still, the chair added, "I think it's unlikely that the next policy rate move will be a hike. I would say it's unlikely." (See: MNI INTERVIEW: Fed Poised For Higher For Longer Stance - S&P)

The FOMC believes the current level of interest rates is restrictive, he said, pointing to cooling off labor demand and softness in interest-sensitive spending. He noted some uncertainty as to whether economic data will eventually confirm whether the current level of interest rates are high enough to bring inflation down to target. "We believe, over time, it will be sufficiently restrictive. That will be a question that the data will have to answer." Markets are pricing in 35 basis points of cuts in 2024, while equities rallied and two-year Treasury yields declined on Powell's comments.

The Fed chair maintained confidence that housing services inflation will continue to cool over time but he acknowledged uncertain lags between market rents and official inflation measures. (See: MNI INTERVIEW: CPI Rent Easing Expected To Continue - Apt List)

QT SLOWING IN JUNE

The Fed also announced Wednesday it would slow the pace at which it’s unwinding covid-era purchases of several trillion dollars in Treasury and mortgage-backed bonds. The Fed's balance sheet stands at USD7.4 trillion, down from $8.9 trillion in June 2022, when it began reducing them. There are roughly USD3.3 trillion in reserves in the financial system and over USD400 billion in usage at the overnight reverse repo facility.

Starting June 1, the Fed will allow reduce its holdings at a slower pace and allow a total of USD60 billion of bonds to run off each month, USD25 billion in Treasuries and USD35 billion mortgage-backed securities.

"Consistent with the committee’s intention to hold primarily Treasury securities in the longer run, we are leaving the cap on agency securities unchanged per month and will reinvest any proceeds in excess of this cap in Treasury securities," Powell told reporters. "With principal payments on agency securities currently running at about USD15 billion per month, total portfolio runoff will amount to roughly USD40 billion per month."

The Fed has noted that by reducing its balance sheet more slowly, it can perhaps shrink it by more. "In particular, slowing the pace of runoff will help ensure a smooth transition, reducing the possibility that money markets experience stress, and thereby facilitating the ongoing decline in our securities holdings that are consistent with reaching the appropriate level of ample reserves," he said.