Stock Market Nerd – Fed Statement & Powell Presser – March 23, 2024
Rate Policy Updates:
- Fed Funds Rate left unchanged at 5.25%-5.5%; the decision was unanimous.
- Fed continues to want more evidence of inflation retreating to 2% before cutting. Still, it expects 3 rate cuts for 2024 (so it believes that evidence will come).
- Fewer Fed officials see more than 3 cuts vs. the previous meeting. Estimated 2024 rate moves from 4.4%-4.9% to 4.6%-5.1%.
- Now sees 3 cuts in 2025 vs. 4 previously & getting to 3.1% in 2026.
- It sees a neutral rate of 2.6% vs. 2.5% previously.
Inflation (no change to 2% target; more progress; more progress needed):
- 2024 Core PCE expected to be 2.6% vs. 2.4% previously & 2.8% as of February.
- 2025 Core PCE projections of 2.2% are unchanged. Sees Core reaching target by 2026.
- Poor January inflation data was likely seasonal. Poor February data did not alter the Fed’s opinion on seeing a clear, yet “bumpy” path to 2% inflation. If this poor data persists, that would change things.
- Strong disinflation progress through 2023 gives them the luxury to wait and see. YTD inflation hasn’t added or removed confidence in path to 2%.
- Long term inflation expectations remain well anchored.
- Powell sees real time market rent disinflation eventually translating into disinflation for the Fed’s lagging rent indicators.
Employment:
- Language surrounding job gains improved.
- Wage disinflation signs strong; labor supply scarcity improving & more progress needed.
- Now sees 4.0% unemployment this year vs. 4.1% previously (currently 3.9%).
Output:
- Fed officials materially boosted 2024 GDP projections from 1.4% to 2.1%.
- Restrictive policy weighing on rate sensitive sectors & fixed business investment levels.
Balance Sheet:
“We discussed slowing the pace of declines in securities holdings. No decision yet, but the general sense is that it will be appropriate to slow the pace of balance sheet runoff fairly soon.” – Powell
- Powell is focused on money market reserves as its signal to slow down passive QT.
- Fed wants a “reserve cushion” & is not looking to drain reserve levels as much as they can. Doesn’t want to repeat 2019 mistake of going too far & having to pivot back to QE.
- Balance sheet over time will be “mostly” treasuries. Still likely some MBS holdings.
This presser and statement were candidly more dovish than I was expecting following the January and February inflation data we got.
More Data from the Week:
- Initial Jobless Claims were 210,000 vs. 212,00 expected. This compares to 212,000 last report.
- Philadelphia Fed Manufacturing Index for March was 3.2 vs. -2.6 expected. This compares to 5.2 last month.
- Manufacturing Purchasing Managers Index (PMI) for March was 52.5 vs. 51.8 expected. This compares to 52.2 last report.
- Services PMI for March was 51.7 vs. 52 expected. This compares to 52.3 last month.
- Existing home sales for February were 4.38 million vs. 3.95 million expected.
- The U.S. Leading Index M/M for February was 0.1% vs. -0.1% expected and -0.4% last report.
- S&P Global Composite PMI for March was 52.2 as expected. This compares to 52.5 last month.
