Keeping Options Open, but Not Overreacting

Some saw a dovish pivot in Fed Chair Jay Powell’s message, especially given the not-so-favorable inflation data for the last two months. We didn’t see it this way.

Federal Reserve Chair Jay Powell kept his options open this week regarding the near-term path of U.S. monetary policy. When asked about the possibility of a rate cut in May or June, he simply noted that “things can happen during an intermeeting period” and that he “wouldn’t want to dismiss anything.” This stands in sharp contrast to his message in January, when he essentially ruled out a cut in March. Some saw a dovish pivot in the Chair’s message, especially given the not-so-favorable inflation data for the past two months. We didn’t see it this way. Let’s take a closer look.

Our long-held view has been that the Federal Open Market Committee is on a cautious transition, from a period of rate hikes to one of rate cuts. But this caution cuts both ways. Just as we thought in January that the good inflation data from the second half of 2023 would not be enough for the FOMC to start cutting rates in March, we haven’t seen the upside surprises to inflation in January and February as being enough for the FOMC take a June rate cut off the table. In the Chair’s own words, the Committee “didn’t excessively celebrate” the good inflation readings from the last seven months of 2023, and, he noted, they “are not going to overreact” to two months of less-favorable data in 2024. He remarked, for instance, that seasonal factors may have played a role in the elevated reading for inflation in January.

We see the FOMC as having both the motive and the opportunity to be cautious on the near-term path of monetary policy. The motive is that the Committee doesn’t want to cut rates too soon, which could risk a flare-up in inflation. But it doesn’t want to cut rates too late either, which could risk a recession. The opportunity is that there is no imminent need to take action one way or another. Despite the surprising upside over the past two months, inflation has trended lower since the middle of last year. And, despite the tight stance of monetary policy, employment conditions remain strong and are normalizing, with the Chair emphasizing that he is not seeing any “cracks” in the labor market.

Powell was asked about the data he is monitoring to have the confidence needed to start cutting rates. He didn’t hesitate to say that, “most importantly,” he will be focused on inflation and its components. For our part, we remain focused on the services component, which has seen less disinflation than the goods component. Investors keen on the future direction of interest rates would do well to do the same.

Meet Your Expert

Antulio N. Bomfim

Head of Global Macro – Global Fixed Income

Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.

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