FOMC Watch - Firmer outlook heralds extended pause
As expected, the Fed decided to keep its policy rate in the 3.50-3.75% range. Miran and Waller dissented, while Bowman voted with the majority to hold. Waller was an interesting one as he has recently stated that the Fed wasn't in a rush to cut rates with inflation above target, but not dissenting would put a nail in the coffin of his Fed Chair aspirations. In the statement, the FOMC removed language on 'downside risks to employment rose in recent months,' and stated that the economy has been 'expanding at a solid pace,' while inflation 'remains somewhat elevated.' Powell noted that interest rates are now appropriate to promote progress towards both of the Fed goals.
This was the first meeting with the new rotation of voting members. New voters are Hammac (Cleveland), Paulson (Philadelphia), Logan (Dallas) and Kashkari (Minneapolis). Logan and Hammack have recently been on the relatively hawkish side, while Kashkari and especially Paulson have shown themselves to be more dovish.
During the press conference, Powell expanded on his views on the economy in response to various questions. On inflation, Powell sees disinflation continuing in services, and attributes most of the elevation to tariffs and goods inflation. The labour market has somewhat stabilized but continues to show some signs of gradual cooling. He sees reduced downside risks predominantly because of the stronger activity data released since the last meeting. Powell was also asked about the divide between output and labour growth, which we discussed in our latest . Powell had no clear answer either but made two points. First, the stabilization of the labour market is resolving part of the tension, but second, the 'lore' is that in case of disagreement between the two, it's usually the GDP estimates that give, suggesting that GDP growth is perhaps somewhat overstated.
On Fed independence, Powell reaffirmed the importance of independent central banks and commented on his appearance at the hearing of Lisa Cook's case, which received criticism form Treasury Secretary Bessent. Powell stated that Lisa Cook's case was the most important legal case in the Fed's history, and that it would be difficult to explain if he wouldn't have attended but naturally declined to comment on Bessent's criticism of his attendance. With respect to his subpoena, and his response, he simply referred everyone back to his video, and did not want to add anything else. He also refused to give more clarity on whether he’ll stay on the board after his chair position ends. He similarly declined to discuss recent movements in the dollar, stating that the dollar is the mandate of the Treasury.
On the timing and extent of future rate cuts, Powell sounded relatively hawkish. He made it clear that it was hard to see that current policy was still restrictive. Moreover, he sees a clear improvement on the outlook for growth compared to December, even if it the growth is K-shaped. He still sees some tension in the mandates, but he feels that both upside risk to inflation and downside risk to the labour market have diminished. The three cuts at the end of last year need to do their work, and no decision has been made on future meetings. He once again stressed data-dependence, and 'letting the data light the way for us.' This data-dependence may be at risk with a potential government shutdown in sight, although it's likely that this time the fog will slow the Fed down.
Overall, the press conference really pushed the idea of a more solid footing on the economy, which makes it likely that we're in for an extended pause, consistent with our base case. Powell has two more meetings as Chair, and we don't think he'll announce another rate change. We think the Fed will resume cutting in June as the new Fed Chair tries to make a mark, and weak labour market data and an inflation windfall from benign oil prices plausibly allowing for additional easing. We see a total of three more cuts by year end.