Takeaways from the FED's MPC speech Mar 24'

 

In-Depth Summary of Federal Reserve Chair Powell's Press Conference (March 20, 2024)

Key Takeaways:

• Progress Made, But Inflation Remains High: The Fed acknowledges progress in lowering inflation while maintaining a strong labor market. However, inflation is still above the 2% target, and achieving both goals remains uncertain.
• Interest Rates on Hold, Potential Cuts Later in 2024: The Fed kept interest rates unchanged at 5.25% to 5.5% but hinted at potential rate cuts later this year if economic conditions evolve as expected.
• Focus on Maintaining Price Stability: The Fed prioritizes bringing inflation down to 2% for long-term economic health and maximum employment.
• Gradual Balance Sheet Reduction: The Fed plans to slow the pace of reducing its bond holdings to ensure a smooth transition in financial markets

Additional Takeaways

• The Federal Open Market Committee (FOMC) will likely hold interest rates steady and slow the pace of reducing the Fed's balance sheet (asset runoff) soon.
• The FOMC is waiting for more signs that inflation is sustainably on track towards the 2% target before considering rate cuts.
• The recent inflation data from January and February is not enough to convince the FOMC that a rate cut is warranted yet.
• The FOMC is committed to transparency and will continue to provide regular updates on its policies.

Detailed Breakdown:

• Dual Mandate: Chair Powell reiterates the Fed's commitment to both maximizing employment and maintaining stable prices.
• Economic Progress: Recent data indicates solid economic growth (3.2% GDP in Q4 2023) but subdued housing activity due to high mortgage rates. The Fed expects slower growth in 2024 (2.1%) and 2025 (2%).
• Labor Market: Job growth remains strong (265,000 per month average), but the unemployment rate has risen slightly to 3.9%. Labor supply is increasing, easing upward pressure on inflation. Labour demand still exceeds supply, however, the gap has narrowed. Median unemployment rate projection stands for 2024 (4%) and 2025 (4.1%)
• Inflation Update: Inflation has decreased but is still above target (2.5% for total PCE prices, 2.8% excluding food and energy). The Fed expects inflation to fall to 2.4% in 2024, 2.2% in 2025, and 2% in 2026.
• Policy Decisions: The Fed maintained the target federal funds rate and continued reducing its bond holdings. They believe the current rate might be the peak for this tightening cycle.
• Future Rate Cuts: If the economy progresses as expected, the Fed might begin lowering rates later in 2024. However, they prioritize controlling inflation and are prepared to maintain current rates or even tighten policy if needed.
• Balance Sheet Reduction: The Fed will likely slow the pace of reducing its bond holdings soon to prevent financial market stress. This doesn't change the ultimate size reduction but allows for a smoother transition.

Fed's Commitment:

• The Fed emphasizes its dedication to achieving price stability and keeping inflation expectations anchored. This is crucial for long-term economic well-being and maximum employment.
• Chair Powell concludes by acknowledging the Fed's actions impact communities nationwide. They remain committed to using their tools to fulfill their public mission of achieving a healthy and stable economy.

Note: This summary incorporates all the numeric estimations mentioned in the transcript for a comprehensive understanding.

Interest Rates and Inflation

• Chair Powell acknowledges concerns about inflation remaining high for too long.
• He emphasizes the importance of getting inflation under control in a sustainable way to avoid needing to raise rates again later.
• The FOMC will be carefully monitoring inflation data, particularly wage growth, to determine when it can start reducing rates.

Asset Runoff

• The FOMC plans to slow down the reduction of its balance sheet holdings (quantitative tightening) in the near future.
• This is to avoid creating disruptions in the financial system.
• The ultimate goal is to reach a smaller balance sheet size than would be possible with a faster runoff pace.

Balance Sheet

• The FOMC is concerned about maintaining ample reserves in the banking system to prevent future liquidity issues.
• They will closely monitor money market conditions to determine when to stop shrinking the balance sheet.

Transparency

• Chair Powell emphasizes the importance of transparency for the Fed and its commitment to keeping the public informed.
• He believes that the increased transparency over the past 30 years has generally been positive.

Additional Notes

• There is no consensus within the FOMC about the exact level of inflation that would justify a rate cut.
• The FOMC is not actively developing a central bank digital currency (CBDC) at this time. They are however, researching the implications of CBDCs.

Overall Tone

The tone of the press conference is cautious and data-dependent. Chair Powell emphasizes the need for the FOMC to be patient and wait for more evidence before making any changes to monetary policy.