The Federal Reserve's March interest rate meeting has come to an end, and in the context of the recent rebound in U.S. inflation, the Fed's signal at this meeting is more neutral, and there is no significant change in the "confidence" of inflation compliance and interest rate cuts within the year. For now, there is more uncertainty about the timing of the first rate cut, with both June and July rate cuts being possible.
Compared to expectations, the Fed's expectations for the economy are more optimistic than the market, and the forecast for inflation is slightly higher than the market. Powell said that the economy has made considerable progress, inflation has eased significantly, and the rebound in inflation data in the last two months has not changed the overall situation, and will not overreact, and it is normal to believe that the inflation data in the first half of the year is strong.
The March meeting kept interest rates unchanged
The Federal Reserve stated at its March interest rate meeting that it maintained the federal funds rate at the target range of 5.25%~5.5%, in line with market expectations. At the same time, the Fed maintains other policy rates:
1) Maintain the reserve interest rate at 5.4%;
2) maintain the overnight repo rate at 5.5%;
3) maintain the overnight reverse repo rate at 5.3%;
4) Maintain the primary credit rate at 5.5%. In terms of balance sheet reduction, the Fed will maintain its original plan to passively reduce $60 billion in Treasury bonds and $35 billion in agency bonds and MBS per month.
In the description of the economy and policy, the March statement was largely unchanged, with the only change being that the phrase "job creation has slowed over the past year but remains strong" was changed to "job creation remains strong" when describing the job market. Correspondingly, in the inflation description section, the phrase "inflation has slowed down over the past year but is still high" has been retained. The above description is in line with recent economic data trends: the US added nonfarm payrolls in January and February 2024 were 229,000 and 275,000, respectively, which is really strong, and the year-on-year readings of PCE and core PCE have remained down over the same period, although there are signs of a rebound in month-on-month growth.
Powell: We are confident that inflation will be met
Overall, against the backdrop of the recent rebound in US inflation, Powell has not lost confidence in achieving the inflation target, and even his "confidence" in the first rate cut has not declined. On the one hand, he stressed that the panorama of inflation improvement remains unchanged and is reluctant to "overreact" to recent inflation data; On the other hand, the mention of an "unexpected" cooling of the job market may also trigger a rate cut, suggesting that the Fed is paying more attention to balancing two-way risks at this stage. In terms of balance sheet reduction, Powell hinted that the balance sheet reduction will be slowed down "soon", in order to avoid unnecessary liquidity risks and ultimately make the road to balance sheet reduction go further, but the node and magnitude of the balance sheet reduction have not yet been clarified.
1) About inflation. The economic forecast raised the core PCE inflation rate to 2.6% in 2024, and the first reporter asked, higher core inflation and stronger economic growth, but maintaining the forecast of three interest rate cuts, does it mean that the Fed is more tolerant of inflation? Powell quickly denied it, emphasizing that economic growth and inflation forecasts are relatively independent, and that this inflation forecast is mainly based on recent data changes, but it is still expected to reach the inflation target over time. The second question is, will housing inflation hinder the achievement of the inflation target? Powell stressed that housing inflation will slow over time, but the timing is uncertain, and he is confident that the Fed will achieve its 2% inflation target. Powell then added his views on inflation to other questions, saying that the Fed is reluctant to ignore the data, and that inflation may be seasonally adjusted higher in the past two months, especially in January, but the overall picture of headline inflation decline has not changed.
2) About the first rate cut and "confidence". Since its last meeting, the Fed has vaguely defined the criteria for its first rate cut as a time when greater "confidence" is needed. There are a lot of issues around "confidence" at this meeting, which is essentially concerned about the node of the first interest rate cut. Powell said that the data since the last meeting (higher inflation) has not strengthened the Fed's confidence; However, he denied that the Fed's confidence has waned, and stressed that he does not want to overreact to recent data. He stressed that there had been good progress in improving inflation in the previous seven months, and that he was just hoping that interest rates would not be cut too soon (so that they would have to raise rates again).
The signal of this meeting is more neutral
Before this meeting, the market expects the Fed to be hawkish, because recent data showed that the US CPI inflation data exceeded expectations for two consecutive months, economic growth and the job market as a whole remained resilient, and concerns about "secondary inflation" rose. However, it expressed more concerns about repeated inflation, and emphasized the balance of "two-way risks", and there was no significant change in the "confidence" of inflation reaching the target and cutting interest rates within the year.
Possible causes include:
First, the improvement in inflation in the previous period does give the Fed strong confidence.
Second, they are satisfied with the current high level of market interest rates, but do not want to see financial market conditions too tight (increasing financial risks such as liquidity), especially considering that this meeting has not officially announced a slowdown in balance sheet reduction. Third, it deliberately maintains policy focus and weakens market speculation about "secondary inflation", which actually helps stabilize inflation expectations.
Although the risk of "no landing" and "secondary inflation" of the U.S. economy has emerged, the recent data is not enough for the Fed to significantly adjust the direction of monetary policy, and there is still a high probability of interest rate cuts within the year. However, there is more uncertainty about the timing of the first rate cut, and both June and July rate cuts are possible. In the coming period, the Fed may continue to maintain a neutral and hawkish tone, keep market interest rates at a high level, create a financial environment that is not conducive to the rebound of inflation, patiently wait and wait for inflation to cool down, and ultimately try its best to pursue a "soft landing" for the economy.
