Did Yesterday's Fed Guidance Actually Change Anything? | Axel Merk

Axel Merk & I react to the latest outlook from the Fed & Jerome Powell

In its latest guidance released this week, the Federal Reserve is holding interest rates steady for now.

The Federal Funds rate will remain unchanged at 5.25%.

And the current pace of Quantitative Tighetening (QT) will continue, unchanged.

But the Fed did lower its rate cut forecast for 2024 to just 1. And it raised its 2025 rate cut expectations upwards from 3 to 4.

It largely did this because its outlook on inflation is notably more optimistic than in previous months.

Wall Street certainly liked what it heard, with the S&P jumping over 1% on the news and Treasury yields falling.

But does this slightly more optimistic view actually change anything?

To find out, I sat down right after Fed Chair Jerome Powell's press conference with fund manager & Fed watcher Axel Merk to get his real-time assessment.

Premium members of this Substack got to watch this discussion live yesterday and ask Q&A.

The replay is now available to all, which you can watch by clicking here or on the image below:

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Adam’s Notes: Jerome Powell Press Conference (recorded 6.12.24)

Given the time-pressures to produce & edit yesterday’s real-time event, I’m breaking from the traditional Adam’s Notes format and instead sharing my bullet-point notes of Jerome Powell’s press conference. I hope you find them useful.

PREPARED REMARKS

• The Fed remains squarely focused on dual mandate

  • We’ve made good progress on these over past 2 years [AT: but no nod to creating runaway inflation, though!]

  • The job market has come into better balance (solid job gains + low unemployment)

  • Inflation has eased. But it’s still too high

• JP reiterated the Fed won’t stop its measures to fight inflation until it reaches its 2% target

• FOMC has decided to hold the Fed Funds Rate at 5.25% and will continuing QT at current pace (no changes)

  • JP intimated that the Fed is awaiting the arrival of the Lag Effects from its “higher for longer” policy

• Economic growth is better than Q1 GDP suggests. Consumer spending is slowing but still remains "solid". Purchasing by corporations is improving.

• The Fed projects GDP growth to average 2.1% this year, and 2.0% for the next 2 years.

• The unemployment is currently at 4.0%. The Fed expects this rate to remain unchanged through the end of 2024 (good luck with that….) and rise slightly to  4.2% by the end 2025. The increase in supply of workers is cooling wage inflation pressures, which are now back to pre-COVID levels

• May CPI came in at 3.3% YoY, and May PCE at 3.4% YoY

  • This shows progress, though the Fed wants to see more before its level of confidence increases

  • JP observes inflation expectations are now "well-anchored"

• Risks to prices and jobs are becoming "better balanced" (meaning price increases are moderating and the labor market is become less “very tight”)

• The Fed is prepared to maintain the current 5.25% Federal Funds Rate for as long as needed to tame inflation back to 2%

• Dot-Plot/SEP headline CPI predictions (these aren't plans, just estimates)

  • 12/24: 5.1%

  • 12/25: 4.1%

  • 12/26: 3.1%

• The Fed is prepared to respond with easing/stimulus measure if the labor market weakens unexpectedly

• FOMC decisions will be made on a meeting-by-meeting basis (based on totality of data)

• Price stability is key as the Fed fully understand that families are impacted by the Fed’s policy decisions [AT: though again, no ‘mea culpa’ offered by JP for the Fed being responsible for the 25% haircut in purchasing power consumers’ wealth has suffered over the past 4 years…]

PRESS Q&A

• Steve Liesman/CNBC: The Fed now projects 2.8% PCE by year-end. Does this suggest inflation is going to get worse this year and the Fed is wrong? Why cut soon if you expect PCE to rise?

  • PCE had very low readings last year, so YoY math is now pushing the annual growth rate up (i.e., don’t worry too much about this rise)

  • We're trying to be conservative in our expectations

  • We won't cut until we have more confidence inflation is coming down than we do today

    • If data comes in better sooner, we'll cut sooner

• Nick Timros/WSJ: The FOMC is split between 1-2 cuts for 2024. If we get more encouraging data like today’s over coming months, will more rate cuts be likely in 2024? Did anyone on the FOMC update their dot-plot forecasts after today's cooler-than-expected CPI/PCE data came in?

  • Not willing to make a commitment. The future data will decide for us.

  • Yes, folks were given the chance to update their dot-plot forecasts

• Does there need to be more cooling of the labor market to tame inflation? Is the labor market becoming more vulnerable to these Higher For Longer interest rates?

  • The labor has moved into "much better balance" over the past 2 years

  • Immigration and a return of domestic workers to the labor force have added worker supply

  • Unemployment slightly rising, though still historically low

  • We still have “strong job creation” (*though, surprisingly, JP noted people's concerns this data may be overcounted*)

  • The discrepancy between Household and Establishment surveys makes the situation ambiguous -- but the Fed is not currently very worried. On balance, labor market still in fine shape

• Why is the number of rate cuts so few for 2024?

  • Inflation data/expectations moved up -- made us more cautious

• Gina Smiley/NYT: The long-run interest rate (neutral rate) forecast moved up. How should we interpret this?

  • The neutral rate is theoretical. Take it with a grain of salt. Doesn't apply to near-term policy.

  • Rates are unlikely to head down to pre-pandemic levels, which were extremely low -- though there's ongoing debate about this

  • Active question: how restrictive is current policy? Unsure. Powell thinks it's sufficiently so, but history will judge

• Despite the current restrictive policy in place, we’re seeing little change in the main metrics: GDP growth is solid, unemployment is contained, inflation isn’t moving fast -- why should we expect more progress by keeping things unchanged?

  • Unwinding of supply chain constraints

  • Increasing labor supply

  • Today's data shows were making progress (didn't say Lag Effect, but implied it)

• Headline data seems pretty good. So why cut?

  • JP expects the Lag Effect (again, not by name) to hit at some point

• Any concern for banks and housing from Lag Effects of H4L?

  • Best thing we can do for the housing market is get inflation down so we can cut rates to support it

    • Though, we'll still have a big inventory shortage

  • Banking system is "strong", we've helped banks heal from last year's worries [AT: not sure many others agree with this….]

• Seems like inflationary pressures in the economy are coming down (cited goods prices, fast food $5 meals,etc). 

  • Powell, yes, that's happening in certain parts of the economy. But it's not coming down (yet) in others: housing, wages, etc

  • Wage increases are not on a sustainable path -- more cooling needed

• Rachel Siegel/WaPo: What will 1 cut this year do to the economy?

  • Pretty hard to say (it's so small). H4L overall more important

  • Expect the market to reprice assets (presumably upwards) when rate cuts start

  • JP thinks the decision to keep rates high after the sticky inflation numbers from earlier this year was the right policy call

• CBS: What's your message to Americans who don't feel good about the economy, despite any "good" data?

  • I don't presume to tell the American public what to think

  • The data show the economy is growing at a solid pace, a "very strong" labor market, we're in disinflation and working to bring it to a halt

    • But…"in the meantime, it's going to be painful"

  • Inflation hurts the poor -- that's why we're working so hard to tame it

  • The Fed won't loosen policy/bring borrowing costs down until confident inflation fight is done

  • The Fed wants to get back to the long period when we didn't have to worry about inflation [AT: **though COL definitely went up faster than official CPI during those “tranquil years”***]

• Financial Times: What data is encouraging to you?

  • Strong economic growth -- we avoided recession & continue to do so

  • Recent inflation data shows cooling

• Any concerns the consumer is nearing a breaking point?

  • Spending has been rising faster than saving over past year

  • A lot of the excess savings from COVID is gone

  • But consumer spending is growing solidly & other part of economy are stepping in with buying

  • We're carefully watching, especially the growing financial pressures on lower income households

• Politico: What would worrisome weakness in the labor market look like?

  • We look at everything & monitor the labor market closely

  • Labor market has tendency to weaken quickly

  • JP doesn't want to speculate on specific risks [AT: so he more or less punted here]

• Implications of the strong dollar geopolitically?

  • Not my purview. That's Treasury [AT: another punt]

• Y! Finance: Why not cut rates this summer, if you're well above neutral, to avoid the risk of waiting too long? Especially if the labor market starts weakening.

  • Doesn't want to be an Arthur Burns (didn't say this exactly, but it's what he meant)

• MarketPlace: Will the coming rate cuts push shelter/housing costs higher?

  • We don't let housing prices drive our decision-making. We look at prices in aggregate. [AT: yet again, another punt]

Follow Axel on X/Twitter @axelmerk

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