Powell Holds Rates Steady, Signals Cautious Future Cuts

Key Takeaway

• Jerome Powell's FOMC announcement met expectations, maintaining the fed funds rate and signaling a cautious stance on future rate cuts.
• Market reactions were volatile but ended nearly unchanged, reflecting uncertainty about inflation and economic data impacts on future Fed decisions.
• The Fed's adjustment to the pace of quantitative tightening (QT) suggests a dovish tilt, potentially easing long-term interest rates while keeping an eye on inflation.

Fed Holds Steady on Rates

In a move that aligned perfectly with market expectations, the Federal Reserve, led by Jerome Powell, maintained the status quo on interest rates, leaving the fed funds rate unchanged. This decision was widely anticipated, and the Fed's guidance for the future also remained largely consistent with previous statements. The only notable addition was an acknowledgment of the ongoing struggle to achieve the Committee's two percent inflation objective, hinting at the complexity of immediate rate cuts. This cautious stance reflects the current economic landscape, characterized by persistent inflation and a robust labor market, suggesting that the Fed is inclined to delay rate reductions.

Market Reaction and Future Outlook

The market's response to the Fed's announcement was a rollercoaster, with initial fluctuations during Powell's press conference followed by a return to starting positions by the end of the trading day. This volatility underscores the market's sensitivity to Fed policy directions and the anticipation surrounding future rate moves. Despite the Fed's current hesitance to cut rates, the underlying sentiment suggests that a cut remains the most probable next step, albeit delayed. This perspective is supported by the fed funds futures market, which has adjusted to expect fewer cuts this year, with only one fully priced in for December.

Data Dependency and Economic Indicators

The Fed's stance has evidently shifted towards a more data-dependent approach, emphasizing the significance of upcoming economic indicators such as unemployment and consumer price inflation. This shift sets the stage for a potentially volatile summer, with each new data release acting as a critical determinant of the Fed's future policy direction. The recent surge in the prices companies are paying, as indicated by the Institute of Supply Management’s manufacturing survey, contrasts with the drop in job vacancies reported by the Bureau of Labor Statistics, presenting a mixed economic picture that complicates the Fed's decision-making process.

Adjustments in Quantitative Tightening

An unexpected development from the Fed's announcement was the adjustment in the pace of quantitative tightening, specifically the reduction of the monthly ceiling on Treasuries from $60 billion to $25 billion. This move, which was more dovish than anticipated, signals a cautious approach to unwinding the Fed's balance sheet and could exert less upward pressure on long-term interest rates. However, the broader implications of this policy tweak and its impact on market liquidity and financial stability remain to be fully understood.

Street Views

• John Velis, BNY Mellon (Neutral on the Federal Reserve's decision):

  "To us, this decision to hold, and to still view an eventual cut as the most likely future move, sets the stage for a volatile summer ahead. Effectively, the Fed is data dependent, meaning every data release — especially as relates to inflation — acts as a referendum on where the Fed will go (or not go). There hasn’t been a lot to suggest inflation is going to moderate."

• Steven Blitz, TS Lombard (Bullish on economic growth signals):

  "The market seems to understand that when the economy is raising interest rates rather than the Fed, it signals growth. The near-100-basis-points change in market pricing of the funds rate in January 2025 has rallied markets as opposed to the opposite last fall."

• Bill Adams, Comerica Bank (Neutral on QT adjustments):

  "In theory, as the Fed slows the pace of QT, they should exert less upward pressure on long-term interest rates... But in practice other developments in financial system are likely outweigh effect of QT’s taper."