Round Two of Testimony; ECB Holds Steady; SOTU on Deck

Federal Reserve Chairman Jerome Powell heads back to Capitol Hill today for a second day of testimony before Congress, this time before the Senate Finance Committee.?Yesterday, before the House Financial Services Committee, as expected, Powell reiterated a message of patience, suggesting rate cuts would likely be appropriate at some point this year but the Committee is not ready yet. Powell was clear the Fed needs further evidence of disinflation, or at least further confidence in the inflation data that the underlying trend will continue to retreat to the price target of 2%.

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In prepared testimony to the House Financial Services Committee, Powell noted, “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%...If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”

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Capitulating to the Fed’s pushback against expectations for a near-term rate cut, investors now anticipate the first-round reduction in June (as opposed to March) with three to four cuts by year-end, down from an earlier forecast of six cuts. While now better aligned with the Fed’s December forecast, even this reduced expectation may still be overly optimistic given the uneven nature and recent acceleration in inflation.?

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Also, speaking yesterday at an event hosted by the Wall Street Journal, Minneapolis Fed President Neel Kashkari reinforced Powell’s message of a delayed start and patient approach to eventual rate cuts, noting expectations for just two?rate cuts this year, maybe even one. “It’s hard for me to see the data that have come in that are saying more cuts than I said in December...At a base case where I was in December, or potentially one fewer, but I haven’t decided yet,” Kashkari said.

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Also speaking yesterday,?San Francisco Fed President Mary Daly spoke on the still stubbornly elevated level of inflation, which she said was due?specifically to increased housing costs as a result of a lack of supply. Speaking at a conference in Portland, Daly said,?“Rising housing costs have been a key driver of these misses, boosting inflation and worsening affordability.”

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Speaking later this morning at 11:30 a.m. ET, Cleveland Fed President Loretta Mester will give a virtual presentation on the economic outlook as part of the European Economics and Financial Centre’s Distinguished Speaker Series.

As the Fed continues to push back against the possibility of a near-term rate cut, other central banks are also pushing the “hold” button. The European Central Bank (ECB), for example, held rates steady for the fourth consecutive meeting earlier today with the main refinancing rate at 4.50%, the marginal lending facility rate at 4.75%, and the deposit facility at 4.00%. Additionally, ECB officials lowered both their growth and inflation forecasts for this year. GDP in the region was revised lower from 0.8% to 0.6% in 2024, and inflation was revised down from 2.7% to 2.3%.

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Other notable commentary includes President Biden’s State of the Union (SOTU) address scheduled for 9:00 p.m. ET tonight. With the November election rapidly approaching and a stark contrast in platform relative to former President Donald Trump, who is widely expected to be the Republican challenger, the SOTU gives an opportunity?to highlight the administration’s economic successes, and according to some reports, “reassure markets that Biden still is up to the job.” The focus is likely to be on the administration’s successes in health care, in terms of lowering costs, as well as raising taxes on corporate America. Biden is also expected to address some of the challenges in the economy, including a tight labor market and still too-high inflation.?

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On the economic calendar front yesterday, ADP reported that private-sector employment rose by 140k, falling short of the 150k gain expected, albeit up from the 111k rise in January. This morning’s report, meanwhile, reinforces reduced?expectations for the all-important jobs report on Friday.

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Also yesterday, MBA mortgage applications rose 9.7% in the week ending March 1 following a 5.6% decline the week prior. The 30-year mortgage rate, meanwhile, fell 2bps to 7.02%, a three-week low.

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Additionally yesterday, job openings, according to JOLTS – the Job Openings and Turnover Survey – edged lower to 8.86M in January from 8.89M in December. According to the median forecast, the number of job openings were expected to be 8.85M in the first month of the year.

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This morning, initial jobless claims were unchanged at 217k for the second consecutive week as last week’s claims were revised down from 215k to 217k. The four-week average declined slightly from 213k to 212k. Continuing claims, or the total number of Americans claiming ongoing unemployment, ticked higher from 1.898M to 1.906M in the week ending February 24.

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The trade deficit widened 5.1% from $64.2b to $67.4b in January, the largest since April. Imports rose 1.1% to $324.6b and exports increased 0.1% to $257.2b.

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Additionally this morning, nonfarm productivity rose 3.2% in the final Q4 report, a two-quarter low, and unit labor costs increased 0.4% in the final Q4 report.

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Later today, consumer credit is expected to rise by $10.0b in January following a $1.6b increase in December.

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Tomorrow, nonfarm payrolls are expected to slow to just 200k in February, potentially marking a three-month low after a larger-than-expected gain of 353k in January.

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The unemployment rate, meanwhile, is expected to remain at 3.7% for the fourth consecutive month, well below what the Fed designates as the full unemployment range, and perpetuating the notion of tight labor market conditions.

Average hourly earnings are expected to rise 0.2% in January and 4.3% over the past 12 months, down from the 4.5% gain in January. 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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-Lindsey Piegza, Ph.D., Chief Economist