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Making up for a lack of major economic data this week was a slew of FedSpeak. As expected, numerous Federal Reserve officials took the opportunity to expand on the January FOMC meeting decision and the Chair’s comments about the fate of interest rates. Federal Reserve Chair Jerome Powell told the press last week that it is unlikely the first rate cut would occur in March, as the Fed wants to gain “greater confidence that inflation is moving sustainably towards 2%.” Seven Fed district Presidents, governors and staff members did their best to validate the Chair’s comment and remove any hope for a near-term cut.
The comments were varied in nature and intensity, but the overwhelming gist is the Fed is not in a hurry to change monetary policy. Committee members agree more time is needed to gather evidence that inflation will continue to fall. While most members avoided any reference to how many cuts may occur, Minneapolis Federal Reserve President Neel Kashkari suggested two to three cuts seemed appropriate. FRB of Boston President Susan Collins believes a “methodical strategy…that eases policy gradually” will provide the most flexibility to manage risk. Chicago FRB President Loretta Mester is also in favor of cutting rates at a gradual pace later this year, acknowledging it would be a mistake to cut rates too soon but there is also risk to the employment mandate if the Fed holds rates high for too long.
The rate-voting committee is acutely aware of several risks to economic activity, including heightened geopolitical risks, easing financial conditions, banking-sector stress around commercial real estate lending and an unexpected deterioration in the labor market. The district presidents expressed satisfaction, and a little surprise, that inflation has fallen as fast as it has even as the labor market has remained resilient and the economy has continued to expand. Mester summed up the Fed’s next step the best: “the FOMC’s job now is to ensure that the economy reaches an even better place by calibrating monetary policy to achieve our dual mandate goals of price stability and maximum employment. Risk management will take center stage.” The fed funds target range has been unchanged at 5.25% to 5.50% since July 2023.
Key Indicators this Week
Trade Balance – The U.S. trade balance, or more appropriately, the trade deficit, narrowed in 2023 to the smallest level since 2009. The trade shortfall shrank almost 19% to $773 billion from a record high in 2022 as the value of imports fell. This was the first narrowing in four years and reflects companies’ attempts to better control inventories by limiting supply, thereby lowering the level of imports. U.S. consumer demand has also shifted away from goods to services. A smaller trade deficit contributes to economic growth. Net exports have added to gross domestic product (GDP) for seven straight quarters. From the third quarter of 2020 through the start of 2022, however, trade subtracted from GDP. The Commerce Department report also revealed how activity with our trading partners is changing. The value of goods imported by the U.S. from Mexico rose nearly 5% from 2022 to 2023, to more than $475 billion. At the same time, the value of Chinese imports tumbled 20% to $427 billion. This change-up shrank the deficit with China by 27%, whereas the deficit with Mexico increased.
Key Market Benchmarks – Treasury yields ended the week more than 25 basis points higher since the month began. The S&P 500 index tried and failed to close above 5,000 as of February 8.
Sarina Freedland – Senior Investment Officer
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