Jay Powell put a lot of emphasis on employment during the Press conference following the FOMC meeting on Wednesday. In the Q&A he was asked whether a slide in employment would likely lead to cutting rates sooner; he was emphatic in his response. Strong body language and the use of the word “Absolutely”. Less than 24 hours later, the US employment figures were weaker than expected with continuing claims up to 1.90M from 1.83, and initial jobless claims were 224k after 214k; the rise in labour costs was way below expectations at 0.5% against a call of 1.2%, as productivity increased.
The combination of his comments and these numbers was enough to propel a 2.7% ($35) rally in gold to test $2,065 before correction to $2,055 where it is looking to stabilise.
Meanwhile in the meeting itself: -
The markets never were expecting change in rates in the January meeting. Prior to this meeting the bond markets were discount an 87% chance of a 50 point cut in May; now hey are looking at a 99% chance of a 25-point cut.
Key points from the Statement: -
- Economic activity expanding at solid pace
- Job gains moderated since early last year but remain strong
- Inflation has eased, but remains elevated.
- Economic outlook uncertain.
- Committee does not expect it will be appropriate to reduce target range without greater confidence of inflation moving sustainably towards 2%.
Press Conference
Economy has made good progress towards the dual mandate objective.
FOMC will continue to significantly reduce securities holdings (already reduced by $1.3Tn over the past two years; currently at $4.7Tn).
Policy rate is “well into restrictive territory”; risks to achieving employment and inflation goals are moving into better balances.
High interest rates appear to have been weighing on business fixed investment.
Labour demand still exceeds the supply of available workers.
Inflation has eased notably but is above the long term goal; core PCE up 2.9% in December. The lower readings in H2 are welcome but FOMC needs “continuing evidence” to build the necessary over inflation and the 2% goal.
If the rate is at its peak for this cycle and if “the economy continues to evolve broadly as expected it will likely be appropriate to begin dialling back policy restraint ats some point this year.
BUT
The economy has surprised forecasters in many was since the pandemic and ongoing progress towards 2% is not assured. The FOMC is prepared to maintain the current target rate for longer, if appropriate. Moving too soon or by too much would risk a subsequent reversal of the progress in reducing inflation and possibly even tightening.
Q&A
What are they looking for in order to gain that necessary confidence?
They have confidence and it’s increasing but they want more. Need more good data (not necessarily better, but a continuation of the good solid numbers). The past six months’ inflation numbers are good, but the FOMC wants to ensure it’s not a one-off.
A year ago they thought they would need softening in economic activity, but that has turned out not to be the case so they don’t see strong growth or strong labour market as problems.
Given that the rapid rise in rates seems to have been predicated on) avoiding a wage-price spiral , and b) risks of inflation expectations becoming “unanchored”; since those hurdles have been avoided, what is there to gain by waiting further with policy rates above 5%?
Almost every Committee participant does believe that it would be appropriate to reduce rates. they are trying to identify a point at which they are sufficiently confident in the inflationary trend that they can begin the process of dialling back. December dot plot; the median participant wrote down three rate cuts this year. We don’t know where the neutral rate of interest is at any given time”
Would a slide in employment bring them to the point of cutting rates?
Yes. If they saw an unexpected weakening in employment that would ”certainly weigh on cutting sooner. Absolutely. Higher or stickier inflation would point to cutting later.
What was the level of unanimity in the meeting?
There was no proposal to cut rates, although there is a healthy disparity of views, which is essential for making good policy.
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