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When it comes to clarity, the Federal Reserve Chair wins the prize this week. Federal Reserve Chair Jerome Powell, whether accidentally or subconsciously on purpose, answered the market's burning question of when the Fed would begin to cut rates. After explaining repeatedly that the Fed wants more assurance that inflation is “moving sustainably towards 2%” to avoid reversing policy too soon and undoing the improvement made, Powell admitted he does not believe a rate cut would happen by the March meeting. The comment came towards the end of the leader’s press conference, which – until that point – left the financial markets almost bored. As soon as the words were in the air, stock indices plummeted. The truth, though, was the financial markets had already anticipated that the first rate cut would not happen until at least May or June. But hearing the Fed is not ready to make a move before March became a scary reality and caused traders of risk assets, i.e., equities, to run for cover.
The FOMC gave the financial market what it had expected, and a bit more, in the first meeting of the year. The committee kept the target rate at the current 5.25-5.50% range, removed wording that previously left the door open for additional rate increases, and signaled openness to cutting rates at some point. The message sent was that the committee is clearly not in a hurry: “The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.” Powell emphasized during his press conference that while the committee is pleased with how far inflation has fallen, it wants to have greater confidence the downward trend will continue. How and when that confidence will be achieved was not made clear, just that “almost everyone on the committee believes” rates will be cut this year. The committee would like to see continued strength in the labor market and a few more months of low inflation reports. Despite the progress made in recovering from the pandemic, Powell does not believe the economy has achieved a soft landing yet and it is too early to declare victory, but “overall, it is a pretty good picture.”
Key Indicators this Week
Jobs – Does the Fed Chair have ESP or just really good intuition? That is a question some people may be asking after the stunning January job report. The U.S. added a whopping 353,000 jobs in January, almost double expectations and the largest gain in a year. December job growth was revised higher by 117,000 for a new total of 333,000 jobs. The unemployment rate remained at 3.7% and wages rose 0.6% in January, the largest monthly gain in two years. Granted there were some seasonal adjustments to both the government and household data, but the fact remains that the U.S. economy is strong. Almost all sectors added jobs except for mining. The service sector accounted for 82% of the jobs gained, with health care and business services topping the list.
What does this mean for the Fed and interest rates? For starters, the committee was right in suggesting there would not be a rate cut in March. Demand and wage pressures are strong. While the Fed is not against a strong economy, it wants to be sure inflationary pressures don’t exacerbate, especially at this pivotal time when the economy is healing. Being patient and gaining more confidence that inflation is under control seems to be the right path. I would not look for a rate hike until mid-year.
Sarina Freedland – Senior Investment Officer
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