Powell strikes a more balanced tone

The policy statement contained a minimal change, revising the ‘lack of further progress' on inflation to ‘modest progress (…),' following April PCE and May CPI inflation releases. A stronger revision was seen in the dot plot, which reduced the median number of cuts from three in March to a single one in June. However, the mode of the distribution came in at two cuts, with eight members signalling two cuts, versus seven signalling just one. The remaining four foresaw no cut in 2024. This compares to a median of three cuts in the March dot plot. By 2025, the median Committee member now expects a total of five cuts, down from six in March, while the upper bound of the fed funds rate is still expected to settle at 3.25% at the end of 2026.

This meeting also saw the release of updated economic projections. Headline and core PCE inflation forecasts for 2024 rose to 2.8% for 2024, from 2.6% in March, and to 2.3% in 2025, from 2.2% in March. The long run projection remains at 2.0%. Median growth forecasts remain unchanged, while the unemployment rate in 2025 and 2026 was raised by 0.1pp. The unemployment rate projection for 2024 remains unchanged at 4.0%, a level that was unexpectedly reached last month already. Overall, the projections suggest they see no deterioration in the economic constellation. Chair Powell pointed out that these projections are generally conservative, with the lack of improvement in annual inflation largely due to base effects of low readings in the second half of 2023, stating that a 2.6 or 2.7% reading at the end of the year would be ‘a good place to be.' Such a level would be consistent with annualised m/m core inflation readings of 2%, similar to today’s release. Moreover, while the FOMC members could update their projections in response to today's CPI release, most didn't.

In the press conference, Powell generally struck a more balanced tone compared to the relatively doveish performance in May. He reiterated the need for confidence that inflation will come down to 2%. Reflecting on inflation readings of this year, he noted that one has to be careful not to dismiss inflation readings one doesn't like, referring to the high readings in the first quarter. Today's release was much more positive, but only a single reading. Regardless, he thinks inflationary pressures have come down, while noting that housing services inflation may remain high for an extended period of time, and that wages are also still running somewhat above a sustainable path.

In discussing the labor market, Powell's assessment was that a broad set of indicators suggest that it is in a similar state to the eve of the pandemic; relatively tight, but not overheated. He acknowledged that the labor market softened, noting that payroll data may be 'overstated a bit,' but that overall the labor market is still very strong.

Overall, there was no question that the next move will be a rate cut, it is just a matter of timing. Similar to the previous press conference, Powell stated that, if the labor market were to weaken unexpectedly, or inflation decrease more rapidly, the committee stands ready to respond. Chair Powell repeatedly mentioned that they are keenly aware of the two sided risks, and that they do not want to wait for the economy to break. Similarly benign inflation readings over the next months will leave the Fed well positioned to start cutting rates in September in order to be ahead of such a weakening.