The Fed Didn't Take a Hawkish Tilt
Being first isn’t always best…
I can remember the first time I ever went goose hunting. It was late October, and I was in my junior year of high school. My father surprised my brothers and I by informing us a friend had offered the use of his home for the weekend. It was located on a creek on the eastern shore of Maryland. And it was a good spot for novice hunters seeking to bag their first bird. So, the next day we headed out.
My older brother was home for a long weekend. He had brought along a college friend who couldn’t stop talking about his prowess with a shotgun. From the moment we walked in the door of our lodgings, all he could talk about was what lay ahead. And I think he finally stopped when I dozed off to sleep.
The next morning, we all got up early to head out to the blind. We had a local guide who set out the decoys and gave us advice on what to do. He told us to sit quietly and wait while he called the birds in. But his last words were that no matter what, don’t try to shoot the birds until they’re coming in to land.
Soon enough, our first set of birds came flying by. No sooner did the guide start calling than the birds made a turn to land. And then just as they were setting up to stall and drop to the water, my brother’s friend jumped up. He was so geared up to be the first, he started blasting away. The problem was the birds weren’t yet within range. And as soon as that first shot happened, the geese hightailed it out of there.
I was reminded of this story yesterday. In the early afternoon, the Federal Reserve released its latest policy announcement. In the press release, it removed language mentioning further progress on inflation growth. And in classic fashion, the financial media rushed to judgement. They all wanted to be the first to report on the news, saying it was akin to a rate hike.
But if they waited until after the press conference, which took place a short while later, they would have heard a different message. Instead, they would have heard Chair Jerome Powell say he expects further progress to be made on price pressures as housing-related costs are finally easing. That should support the outlook for more rate cuts later this year and a steady rally in the S&P 500 Index.
But don’t take my word for it, let’s look at what Powell said…
Yesterday, after lowering borrowing costs by 100 basis points during the last three meetings. The Fed finally decided to hit the pause button. It left the federal funds target range unchanged at 4.25% to 4.50%.
The lack of change was as Wall Street had expected. But the outlook details that came out during the press conference is where the event got interesting.
Contrary to the speculation that the Fed removed language about inflation progress due to a belief that it was taking off once more, Powell said the opposite. He said inflation is still moving closer to the 2% goal. He noted conditions in the labor market moved back toward pre-pandemic levels. That means wages aren’t placing upward pressure on inflation growth.
Powell said the committee’s assessment of the level of interest rates hasn’t changed since the December meeting. He that policy is less tight than it was a year ago due to the 100 basis points worth of rate cuts enacted during the Fall, But he stated that borrowing costs remain restrictive and are doing their job. He stated the adjustment has given the central bank room to study the economic effects before making even more cuts.
The Fed chief said there are still some concerns that inflation could move up slightly in the near term. But Powell said the longer-term outlook for slowing price pressures is still the same. He noted that housing related cost growth is finally starting to ease. That has been one of the major inflation hurdles and points to further slowing as we move forward. ?
But the most telling signal came when he was asked about the propensity for the Federal Reserve to cut rates more…
Powell said that with the effective federal funds rate at 4.3%, borrowing costs are meaningfully above everyone on the Federal Open Market Committee’s estimate for the long-run neutral level. He also stated inflation doesn't need to be all the way back to target before the central bank starts cutting interest rates again. It just wants to see further progress on the pace of growth and is confident it will.
In other words, there’s plenty of room to cut interest rates when policymakers feel they’re ready.
So, like I said at the start, the financial media was quick to rush to judgement. They looked through the initial press release to find the most negative piece of information. And the disappearance of the “further progress on inflation” phrase was all they needed.
But instead, if those same negative nellies had waited until after the 2:30 p.m. press conference they would have heard otherwise. Because, based on what Powell told us, central bank policymakers are still inclined to lower rates further, supporting a steady rally in the S&P 500.
Five Stories Moving the Market:
The Federal Reserve hit the pause button on recent interest rate cuts, entering a new wait-and-see phase and drawing a rebuke from President Trump, as it tries to determine whether and how much more to lower rates from a recent two-decade high – WSJ. (Why you should care – the central bank signaled it still intends to cut interest rates further)
Microsoft Corp. said its cloud-computing business will continue to grow slowly in the current quarter as the company struggles to build enough data centers to handle demand for its artificial intelligence products – Bloomberg. (Why you should care – management expects sales to remained constrained as it spends to build out infrastructure)
领英推荐
The Bank of Canada trimmed its key policy rate by 25 basis points to 3%, cut growth forecasts, and warned Canadians that a tariff war triggered by the United States could cause major economic damage – Reuters. (Why you should care – the Bank of Canada forecast retaliatory 25% tariffs between the U.S, and Canada would cause a 2.5% drop in economic growth)
Meta Platforms posted record revenue in the fourth quarter, aided by artificial-intelligence improvements to its ads business; the Facebook and Instagram parent reported a 21% increase in sales and $20.8 billion in net income, both ahead of analyst expectations – WSJ. (Why you should care – CEO Mark Zuckerberg said he expects 2025 to be a really big year, driven by its AI products)
The U.S. trade deficit in goods widened to a record high in December, likely as businesses front-loaded imports of industrial supplies and consumer goods in anticipation of broad tariffs from President Donald Trump's new administration – Reuters. (Why you should care – the potential for slowing growth highlights the risk of the Federl Reserve’s rate cut and inflation outlooks to be moving in the wrong direction)
Economic Calendar:
Earnings – AMZN, AAPL, CAT, CI, INTC, KLAC, MA, MO, SHW, UPS, V
Markets Closed in China, South Korea, and Taiwan
RBA Economic Bulletin
France – GDP (Preliminary) for 4Q (1:30 a.m.)
Spain – CPI (Preliminary) for January (3 a.m.)
Germany – GDP Preliminary) for 4Q (4 a.m.)
BOE Consumer Credit for December (4:30 a.m.)
Eurozone – GDP (Preliminary) for 4Q (5 a.m.)
ECB Policy Announcement (8:15 a.m.)
U.S. - Initial Jobless Claims (8:30 a.m.)
U.S. - Continuing Claims (8:30 a.m.)
U.S. – GDP (Preliminary) for 4Q (8:30 a.m.)
ECB’s Lagarde Speaks (8:45 a.m.)
U.S. – Pending Home Sales for December (10 a.m.)
U.S. - Energy Information Administration Weekly Petroleum Inventories (10:30 a.m.)
Treasury Auctions $22 Billion in 5-Year TIPS (1 p.m.)
Fed's Balance Sheet Update?(4:30 p.m.)