It’s Fed Day! A Message of Reassurance and Action

It’s Fed day! And it couldn’t come soon enough as uncertainty begets uncertainty. While the argument still remains for the Fed to take a pause and offer further breathing room for banks already under pressure from a rapid rise in rates in the last year, most investors have resigned themselves to the other side of the coin. Given the Fed – and Treasury – have taken sizable steps to stabilize market conditions and inflation remains still well above the Fed’s comfortable target range, the Committee is expected to move forward with an additional 25bp increase later today?at roughly an 88% probability. After all, a failure to act given still too high inflation would likely indicate a more heightened level of concern regarding financial market conditions, potentially exacerbating fears and volatility. We would agree. Where we differ from market consensus, however, is the longer-run pathway for rates.

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According to the fed funds forward curve, after today’s presumed quarter point hike, the Committee is expected to cease further tightening and employ the first rate cut by Q3, potentially taking the upper bound of the target down 53bps by year-end. Given the Fed’s mandate and hyper-focus on taming inflation, however, it will be difficult for the Fed to justify stopping short of ensuring a return of price stability. As Chair Powell has noted time and time again, while achieving such a goal will be?”painful,”?the economy doesn’t??work for anyone without price stability.

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The Summary of Economic Projections (SEP) will?be the clear-cut indicator of the Committee’s longer-run expectations. Widely expected to move higher as the pace or momentum of disinflation has slowed and incoming economic data have either outperformed or indicated ongoing resilience in the underlying economy, more recently in the wake of market jitters, now most anticipate a significant reduction in the dots. Again, we differ and continue to expect the Fed to hold steady with a risk for at least some dots to shift higher. Of course, a lack of downward movement would in no way suggest that the Fed is making a forecast in a?vacuum void of a broader perspective of market conditions, but rather that the Committee is making an unbiased and certainly unemotional assessment that officials can continue??to remove, or at least offset, some of the added pressure on institutions as a result of higher rate policy via new and additional lending facilities while remaining focused on its longer-term goal of price stability. The former not taking precedence over the latter.?

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Given the Fed’s blackout period set in just as Silicon Valley Bank collapsed there has been little communication from Fed officials on the subject. Thus, perhaps more than today’s rate announcement itself, the press conference is likely to prove even more important and lively as investors seek answers for key questions: How concerned are officials regarding recent events? Are Silicon Valley Bank and Signature Bank viewed as isolated incidents, or an indication of a systemic issue? Does swift action taken by the Fed to increase liquidity put this to bed, or is this the first of many complications in the banking sector? Can the Fed continue to raise rates amid market unease? Is the U.S. labor market really as solid as the latest data indicate? Does the Committee have the resolve to raise rates in an effort to reset inflation at the risk of financial market stability?

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Chair Powell is likely to strike somewhat of a neutral tone or one of reassurance, at least early on, attempting to convince market players that 1) the banking system is safe and sound, 2) the Committee will do what’s necessary going forward to keep such conditions intact, and 3) reiterate the more isolated nature of recent events as opposed to acting as evidence of a broader or systemic underlying issue.?

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Powell is furthermore likely to reiterate a need to stay the course and tackle inflation despite recent volatility, or additional hardship. Without taming the inflation beast now, the Fed risks undermining progress already made and a second round of tightening down the road which would likely prove even more painful.?The lack of clearly dovish comments, however, will likely be painted as hawkish by default, keeping pressure on markets.?

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Yesterday, existing home sales?jumped 14.5% in February from 4.00m to an annualized pace of 4.58m, the largest gain since July 2020 and the highest level since September. According to?Bloomberg, existing home sales were expected to rise 5.0% in the second month of the year.

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Year-over-year, however, existing home sales declined 22.7% in February, the 19th?consecutive month of decline. Due to a decline in sales, the months’ supply of existing homes fell from 2.9 to 2.6 months, averaging 2.8 months over the past three months. From a price standpoint, the median cost of a previously owned home fell 0.2% in February from a year earlier to $363k.

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This morning, MBA mortgage applications rose 3.0% in the week ending March 27 following a 6.5% gain the week prior. The 30-year mortgage rate, however, declined 23bps to 6.48%, a five-week low.

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Tomorrow, new home sales will be released along with the Chicago Fed and Kansas City Fed Indexes. Last month, the Chicago Fed Index rose from -0.46 to +0.23, and the Kansas City Fed inched up from -1 to 0 ahead of a weak reading in the national ISM, rising from 47.4 to 47.7. While each regional survey represents a slightly different region of the country with varying industry focus, with a marked decline in the consumer, production activity has slowed broadly across the U.S., an ongoing indication of weakness suggesting a further decay in the national figure released at the start of next month.

And finally, at the end of the week, the preliminary read on February durable goods will be released. Durable goods orders dropped 4.5% in January, more than the 4.0% decline expected and the largest monthly decline since April 2020. Year-over-year, headline orders rose 3.0% in January, down from the 11.2% annual increase the month prior.

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-Lindsey Piegza, Ph.D., Chief Economist?