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Market Pulse: April 22, 2024

Powell pivots.

It’s part and parcel of his style of policy leadership. Maybe his pivots are a positive aspect of the way he goes about his business, maybe they are not. In either case, it doesn’t really matter; Powell is as Powell does. It’s not up to us to figure out how the Fed should conduct policy it is only up to us to figure out how they will conduct policy. Powell pivots, deal with it.

As I define it, a Powell pivot is a relatively quick about face on a key policy feature, that notably changes the map for the future path of the Fed. Not saying such a recalibration is the wrong thing to do, when facts change so too should one’s thoughts on a particular topic change.

The lawyer in Powell always makes sure that he couches any forward-looking views on policy with the caveat that the Fed is data dependent. But to me, the confidence with which he expresses his outlook makes any qualifier seem more pro forma than it does a caution that he will deviate from the path he has laid out. Powell is the confident navigator of the course of Fed policy, until he is not, and then he pivots.

It was early October 2018. The Fed had just hiked rates by a quarter point, up to 2.25%, the week before. Powell was participating in a Q and A session, during which he explained that the economy no longer required the overly easy policy stance that predominated since the Great Recession. “The extremely accommodative low interest rates that we needed when the economy was quite weak, we don’t need those anymore. Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral. We may go past neutral, but we’re a long way from neutral at this point, probably.”

This was a plan for the longer run; a journey, not a weekend out of town. But as it turned out, the Fed hiked the funds rate just one more time, a quarter point in December 2018, and that was the end of that cycle. There was no getting to, and maybe going through, the neutral rate. From the time Powell gave those forward-looking comments, it was one and done. Rate cuts began in mid-2019 and by the one-year anniversary of his October 2018 Q and A session, the policy rate was down at 1.75%.

During the post-meeting presser earlier this year in January, Powell said the FOMC believed the “policy rate is likely at its peak” for the cycle. This was a step further than they had gone previously; for instance, the month before they would only concede the rate was “at, or near” the peak.

Furthermore, the expectation on the Committee at the time was that rates were going to be reduced in 2024, and that the Fed would get the cycle rolling once there was just a bit more confidence that the ongoing trend for inflation data would continue. They didn’t need better data, Powell said, just more of the same. A rate cut as early as March was not likely, but the Fed boss didn’t take the possibility off the table, “I don’t think it’s likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that. But that’s, that’s to be seen.”

Five weeks later, in remarks to the Senate Banking Committee in early March, Powell suggested the countdown to cutting was getting shorter. No precise timetable of when the Fed would ease, but not much room for doubt that the clock was ticking.

“We’re waiting to become more confident that inflation is moving sustainably at 2%. When we do get that confidence, and we’re not far from it, it’ll be appropriate to begin to dial back the level of restriction,” Powell said in response to a question about rates and inflation. He said the cuts would be so the Fed doesn’t “drive the economy into recession rather than normalizing policy as the economy gets back to normal.”

Sure, the Fed is data dependent, but “not far from it” suggests a degree of confidence beyond the happenstance of government data.

Not so fast.

Recent reports on the Consumer Price Index (CPI) and the labor market have surprised to the upside; stronger than expected. Facts changed…Powell pivoted.

"The recent data have clearly not given us greater confidence and instead indicate that it's likely to take longer than expected to achieve that confidence," Powell said last Tuesday while speaking at an event in Washington, D.C.

No longer is the ticking clock a way to measure the arrival of the first rate cut, it is the flutter of turning a page of the calendar.

Truth be known, the Consumer Price Index has not cooperated for quite a while; well before recent CPI and labor data turned Powell from “not far from it” to “take longer than expected”, when handicapping the arrival of a confidence level sufficient to start cutting interest rates.

The last Fed’s rate hike was in July 2023. The CPI was 3.2% in that month, and that was considerably off the peak rate of 9.1% set just thirteen months earlier. The annualized rate of the CPI measure of inflation was coming down faster than it had gone up.

But that was it for the CPI disinflation; the trend since then has been sideways to up, with the latest result at 3.5%.

In regards to the path followed by the CPI in the last eight months, it is a wonder that the Fed was gaining any confidence on the future for inflation and how that would open the door for easing.

However, the Fed’s touchstone for inflation is not the CPI, but rather the Personal Consumption Expenditures (PCE) Core inflation measure. The PCE Core is considered to be more accurate and the better predictor of the future direction of consumer prices. The Fed has their reasons to favor the PCE Core over the other inflation measures, so be it. For this essay, the interesting thing is the divergence in the paths followed by the PCE Core and the CPI since the last Fed rate hike in July last year.

Since the Fed last raised the funds rate the PCE Core, year on year, is down 1.4 points, from 4.2% last July, to 2.8% in February; the March report is due out on Friday. The PCE Core is down 33% since the Fed last hiked; not a single uptick along the way.

The last three PCE Core reports have either matched the forecast or, as was the case for the December reading, is a touch lower than the estimate. Quite the contrast.

Sure, the Fed monitors all the data, “the totality”, and there is no doubt the CPI, the labor data, GDP, et al, have been strong and this argues against the Fed moving too soon (at all?) on an easing cycle.

But, Powell pivots.

If the PCE Core continues with its trend, (your guess is as good as mine) and if some of the other data erodes, another pivot could be in the cards.

It is worth noting, the Fed projects a 2024 year-end PCE Core reading of 2.6%, just a couple tenths below the latest print. Maybe that’s too high?