Anyone who has been listening to Jerome Powell for some time now will think that he is answering ‘the Galician way’ every time he is asked about the future evolution of interest rates or the central bank’s intentions when it comes to opening or closing the tap. of your balance adjustment. Yes, but no…it depends on the data. The governor of the Federal Reserve (Fed) continues to hold the “meeting by meeting” type to the point that next July it will be one year since he last raised rates. Since then, inflation has shown resistance to falling to 2% and the economy has gone from seeking a ‘soft landing’ in 2024 to a ‘takeoff without touching a runway’.
“We know that reducing the monetary policy brake too soon could result in unite the progress seen in the impisIon and a stricter policy to return inflation to 2%. At the same time, reducing the monetary policy brake too late or “To an insufficient extent it could jeopardize employment, considering any evolutionary outlook and balance of risks,” Powell said in a press release.
The delayed effect of monetary policy
Aware that the effects of its decisions take months to be transferred to the real economy, the Fed fears being forced to back down if inflation gains strength again or, on the contrary, that a sudden deterioration in financial conditions will slow things down. . economic Sciences. “The committee does not expect it to be appropriate to reduce the target range until it has gained confidence that inflation is moving sustainably towards 2%. Of course, we are committed to both aspects of our dual mandate and an unexpected weakening in the labor market could justify a monetary policy response,” he argued.
After five consecutive meetings of monetary immobility and with these at their highest level in two decades, Powell is approaching his first anniversary without moving rates after a rate hike cycle, the longest streak since before the crisis. 2020, when he lowered them for the last time due to the Covid-19 pandemic.
Reaction on Wall Street
Markets welcomed Powell’s neutral stance and his maintaining his December forecast of three rate cuts in 2024 (75 basis points in total). The S&P 500 ended the day with an advance of 0.9%, above 5,200 points, while the Nasdaq Composite rose 1.25%. The dollar depreciated against the euro to 1,093 units and the yield on the 10-year bond fell to 4.28%.
The moderate upward revision of the PCE (consumer spending) inflation indicator was accompanied by a drastic improvement in forecast growth, from 1.4% to 2.1%. “This is modestly dovish, but with growth and inflation projections revised more firmly, the Fed believes the risk is that interest rates will be higher than previously thought over the long term,” they commented in an analysis. at the end of the meeting James Knightley and Chris Turner, economists at ING Research.
On the other hand, the possibility of a delay in the arrival of a rate cut hardly worried investors because the central bank accompanied its decision with a commitment to ‘reverse tapering’, that is, a reduction in the pace at which currently drains liquidity. The Fed is letting $95 billion a month in Treasury bonds and mortgage-backed securities mature on its balance sheet. It began that quantitative tightening (QT) in 2022 and has since reduced its securities portfolio by more than $1.5 trillion.
Balance, delayed braking in gear
“We are not discussing all the other balance sheet issues. We will discuss that in due course. But what we are really looking at is reducing the pace of liquidation. We are talking about moving to a lower pace. I don’t want to give you a specific number because we haven’t l “due to an agreement or a decision. As for the timing, I would say ‘fairly soon’. I don’t want to be more specific than that,” he noted. A majority of experts expect this announcement to be made in June, according to ING.
“This is in our long-term planes, in fact, we could go lower because we would avoid the kind of frictions that can occur. Liquidity is not distributed equally in the system. There may be times when, reserves are abundant, but not everywhere. In those parts where they are not enough, there can be stress. That can cause you to prematurely start pushing. Maybe something like that could have happened in 2019,” Powell admitted. The reference to what happened then, with a QT of -50 billion in progress, seems to have left its mark on the Fed president and he does not seem willing to repeat the mistake.
However, the president did not forget to emphasize that the economic outlook remains uncertain despite the stability shown in the Fed’s table of estimates. In other meetings, Powell has taken it upon himself to downplay their importance despite the fact that they are highly followed among economists. , investors and analysts. The truth is that the central bank that everyone looks at only has eyes for one indicator: inflation. His approach will remain data-dependent. “We’ll have to see how the data comes in. Of course, we’d love to get really good inflation data. We got good inflation data in the second part of last year, but we said we needed to see more. Now we have January and February, Those he spoke about a couple of times. We are looking for more,” he concluded.
