Powell Confirms, the Fed is Not in a "Hurry" to Cut Rates

On Friday, Federal Reserve Chairman Jerome Powell joined the growing number of Fed officials reiterating a message of patience in the aftermath of the March FOMC rate decision. With Atlanta Fed President Raphael Bostic and Fed Governor Christopher Waller, for example, suggesting a reduced outlook for rate reductions relative to earlier forecasts at the end of 2023, Powell also suggested a potentially more tempered path. "We don’t need to be in a hurry to cut," he said at a San Francisco Fed event.?“The fact that the U.S. economy is growing at such a solid pace, the fact that the labor market is still very, very strong, gives us the chance to just be a little more confident about inflation coming down before we take the important step of cutting rates.”

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Powell’s comments of course came just after the latest inflation data showed an acceleration in headline price pressures with minimal improvement in the core. Recall, on Friday the PCE rose 0.3% in January, and?2.5% year-over-year. While in line with expectations, this was an increase from the 2.4% annual gain in January.

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Excluding food and energy, meanwhile the core PCE rose 0.3% in January, as expected and following a 0.5% gain at the start of the year. Over the past 12 months, core inflation increased 2.8%, a minimal retreat from a 2.9% annual gain in January.?

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Bottom Line: Despite the Committee opting to hold rates as well as the outlook for three rate cuts later this year unchanged, with inflation showing further signs of disobedience relative to the Fed's – and the market's – expectations for more meaningful improvement, the likelihood of a change in policy, let alone of sizable downshift in rates is increasingly under pressure.?That’s not to say policy makers won’t be willing to cut rates by year-end, as this is certainly a Fed desperate to provide relief.?But even after initiating the first-rate reduction, without a more sizable retreat in price pressures, there may be little more the Committee can offer. In other words, as Minneapolis Fed President Neel Kashkari among others have suggested, perhaps after a cut or two, an extended pause may be necessary.??

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Also on Friday, personal income rose 0.3% in February, slightly lower than the 0.4% gain expected and following a 1.0% jump in January. Consumer spending, meanwhile, increased 0.8% in the second month of the year, surpassing the expected 0.5% gain and following a 0.2% rise in January. Year-over-year, personal income rose 4.6% in February, the weakest annual gain since October, while consumer spending increased 4.9%, the largest annual gain in two months.

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Adjusting for inflation, real income fell 0.1% in February, the first monthly decline since September, and real consumer spending rose 0.4%, a two-month high. Over the past 12 months, real disposable personal income gained 2.1%, the weakest increase since October, and real spending rose 2.4%, the strongest annual increase since December.

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This week, the economic calendar is again quite robust beginning this morning with a look at manufacturing activity.?

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The S&P Global U.S. Manufacturing PMI fell from 52.5 to 51.9 in the preliminary March print, a two-month low. According to the median forecast, the index was expected to remain at 52.5 for a second consecutive month.

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On the other hand, the ISM Manufacturing Index rose from 47.8 to 50.3, surpassing the expected gain to a reading of 48.3 and moving into expansionary territory (a reading above 50) for the first time since September 2022.

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In the details of the report, production rose 6.2 points to 54.6, the highest reading since June 2022, new orders increased from 49.2 to 51.4, and inventories climbed from 45.3 to 48.2 at the end of Q1. Also, prices paid increased from 52.5 to 55.8 in March, averaging 50.2 in the past six months. Additionally, employment ticked up from 45.9 to 47.4 in March, albeit still marking the sixth consecutive month in contractionary territory. On the other hand, backlog of orders remained at reading of 46.3 for a second consecutive month, while customer inventories dipped from 45.8 to 44.0 in March, a two-month low.

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Bottom Line: The March report indicates the first “expansion” in U.S. factory activity since September 2022, a welcome confirmation to Powell’s assessment of solid U.S. activity. That being said, while a?rebound in production indicates a welcome recovery in demand, employment continues to lag and rising input costs underscore stubbornly elevated inflation through the economy.?

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Finally, this morning, construction spending unexpectedly fell 0.3% in February following a 0.2% decrease at the start of the year and marking the largest monthly decline since October 2022. According to the median forecast, construction spending was expected to rise 0.7%. Over the past 12 months, construction spending rose 10.7%, the smallest annual gain since September.

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Tomorrow, the number of job openings according to JOLTS – the Job Openings and Labor Turnover Survey – is expected to decline slightly from 8.9M to 8.8M in February, and factory orders are expected to rise 1.0% in February following a 3.6% decline the month prior.

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Later in the week, on Wednesday, ADP is expected to report that private-sector employment rose by 150k in March following a 140k increase the month prior, and an updated look at services activity is expected to show that the March ISM Services Index ?

rose minimally from 52.6 to a reading of 52.8. ?

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While services activity has slowed markedly from earlier peak levels, it has remained in expansionary territory post-pandemic save for a brief dip in December 2022. Consumers have cut back nominally on dollar expenditures, but at the same time, they’ve reverted back to a pre-pandemic preference for experiences or services over goods. A look at the services sector is expected to show that the ISM Services Index ticked up slightly from 52.6 to 52.7 in March.

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On Thursday, weekly jobless claims?and the February trade balance reports will be released.

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On Friday, the March nonfarm payrolls report will be released, the key report of the week. After a larger-than-expected gain of 275k in February, nonfarm payrolls are expected to slow to just 205k in March, potentially marking a four-month low.?

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The unemployment rate, meanwhile, is expected to tick down from 3.9% to 3.8%, a two-month low and well below what the Fed designates as the full unemployment range, and perpetuating the notion of tight labor market conditions.

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Also, average hourly earnings are expected to rise 0.3% in March, more than the 0.1% gain in February and potentially resulting in a 4.1% increase over the past 12 months, down however from the 4.3% pace at the start of the year. Wages continue to remain elevated, compounding pressures on businesses while offering a welcome offset to elevated prices and higher borrowing costs on the consumer side. ? ?

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Finally, on the Fed-speak front, there are a number of Fed officials slated to take the stage throughout the week, including Fed Governor Lisa Cook who will speak this evening at 6:50 p.m. ET, New York’s John Williams, Cleveland’s Loretta Mester, San Francisco’s Mary Daly, and even Chair Powell himself who will speak at a Stanford University event on Wednesday. ?

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