Takeaways from the FED's MPC speech Jun 24'

Federal Reserve Chair Jerome Powell addressed the current economic conditions, monetary policy decisions, and future outlook. He emphasized the Fed's commitment to its dual mandate of maximizing employment and stabilizing prices, noting significant progress over the past two years.

Labor Market:

• Summary

• Job gains averaged 218,000 per month in April and May, slightly lower than in the first quarter.
• The unemployment rate rose to 4%, with strong job creation and increased labor force participation, especially among those aged 25-54 and immigrants.
• Nominal wage growth has eased, and labor market conditions have stabilized to pre-pandemic levels.
• The median unemployment rate is projected to be 4.0% at the end of 2024 and 4.2% at the end of 2025.

• Trends
• The labor market is described as coming into better balance. Unemployment is at 4%, indicating a robust labor market, which Powell considers a significant achievement. However, the pace of wage increases remains a concern.
• Wages continue to increase above a sustainable path aligned with trend inflation and productivity. Although wages are not seen as the primary cause of inflation, achieving the target of 2% inflation likely requires wage growth to moderate.

 

Inflation:

• Summary
• Inflation decreased significantly from a peak of 7% to 2.7%.
• Total PCE prices rose by 2.7% over the 12 months ending in April, and core PCE prices increased by 2.8%. The median projections for PCE inflation are 2.6% for 2024, 2.3% for 2025, and 2.0% for 2026.
• The Consumer Price Index (CPI) rose by 3.3%, and core CPI by 3.4%.
• Despite this progress, inflation remains above the Fed's 2% target.

• Trends
• Chair Powell acknowledges that while inflationary pressures have diminished, the economy is still experiencing high inflation in specific areas, notably non-housing services and housing services, partially attributed to earlier inflationary pressures. Goods prices have fluctuated, with an unexpected rise in import prices complicating the overall picture.
• Despite a challenging quarter with higher inflation, recent data shows more positive trends, suggesting some progress towards the 2% target. However, Powell stresses the importance of not overreacting to individual data points and instead focusing on sustained trends.

 

Monetary Policy:

• Interest Rates and Securities:
• The Federal Open Market Committee (FOMC) decided to keep the policy interest rate unchanged, maintaining the target range at 5.25% to 5.5%.
• They will continue reducing securities holdings. The goal is to align demand with supply and reduce inflationary pressures.

• Future Rate Adjustments:
• The committee does not anticipate lowering the federal funds rate until there is greater confidence that inflation is sustainably moving towards the 2% target.
• Current projections suggest the federal funds rate will be 5.1% by the end of 2024, 4.1% by the end of 2025, and 3.1% by the end of 2026. These are not fixed plans but will adjust based on economic developments.
• Powell downplays the significance of a single 25 basis point rate cut, suggesting that the overall path of rate changes is what truly matters. When policy loosening begins, it is expected to significantly impact financial market conditions. 

 

Economic Activity:

• GDP Growth:
• Although GDP growth slowed from 3.4% in Q4 of the previous year to 1.3% in Q1, private domestic final purchases grew by 2.8% in Q1, indicating strong underlying demand.
• Consumer spending growth has decelerated but remains solid, and investment in equipment and intangibles has improved. T
• The median GDP growth projection is 2.1% for 2024 and 2.0% for the next two years.

 

Risks and Policy Stance:

• Balancing Risks:

• The Fed is attentive to the risks of reducing policy restraint too soon, which could reverse progress on inflation, and delaying action, which could weaken economic activity and employment. Decisions will be data-driven, balancing the need to support economic growth while ensuring price stability.

• Public Mission:
• Powell underscored the importance of the Fed's role in supporting the economy, emphasizing their dedication to achieving maximum employment and stable prices for the benefit of all Americans.
• Powell acknowledges a disconnect between positive economic data and public sentiment. He refrains from speculating on why people might feel pessimistic despite favorable indicators, underscoring that the Federal Reserve's role is to manage economic policy based on data, not public perception.

 

Q&A with Chair Powell:

·       Economic Growth and Inflation

Powell explained the complexities of measuring shelter inflation, particularly with the lag in reflecting market rent increases in existing rental agreements. The methodology for calculating owners’ equivalent rent (OER) is consistent with international practices, although it presents challenges in accurately capturing housing services' inflation

Powell explained the complexities of measuring shelter inflation, particularly with the lag in reflecting market rent increases in existing rental agreements. The methodology for calculating owners’ equivalent rent (OER) is consistent with international practices, although it presents challenges in accurately capturing housing services' inflation

·       Labor Market and Consumer Behavior.

Edward Lawrence highlighted the increase in multiple job holders (634,000 more people, an 8.2% rise) and a 19% price increase since January 2021. Powell acknowledged that spending has often outpaced disposable income, leading to increased credit card use and rising credit card balances and defaults, though these remain at manageable levels. The household sector is still in relatively good shape but not as robust as it was a year or two ago.

·       Monetary Policy and Rate Cuts

Victoria Guida from Politico inquired about potential triggers for rate cuts. Powell stated that unexpected weakening in the labor market could prompt rate cuts sooner. However, he clarified that such decisions would be based on a comprehensive assessment of various economic indicators, not just labor market data alone.

Simon Rabinovitch from The Economist asked if a series of positive inflation reports could hasten rate cuts. Powell responded that the Federal Reserve looks at the totality of data rather than following a mechanical approach based on specific numbers.

·       Impact of Strong Dollar and Housing Prices

Kosuke Takami from Nikkei asked about the impact of a stronger dollar. Powell explained that while the dollar has strengthened due to the robust U.S. economy, the Federal Reserve does not manage its level. The focus remains on maximum employment and price stability.

Jennifer Schonberger from Yahoo Finance questioned why not cut rates sooner, given the current inflation forecast. Powell reiterated the careful balancing act between avoiding premature easing, which could disrupt economic progress, and not waiting too long, which could harm economic activity and employment. The Federal Reserve aims to be confident that inflation is sustainably moving towards 2% before adjusting policy.

·       Framework Review Process

Evan Ryser from Market News International asked about the upcoming framework review process. Powell indicated that the review would start later in the year and would involve extensive planning and consideration of various aspects, including communication strategies. The details will be outlined as the time approaches.

·       Final Question on Housing

Nancy Marshall-Genzer from Marketplace asked if high shelter prices would delay rate cuts. Powell clarified that no single variable, such as housing prices, would solely determine policy decisions. The overall test remains achieving greater confidence that inflation is moving towards 2% sustainably or observing unexpected labor market weakening.