BY: Matthew Kimbrough
Portfolio Manager
Leading up to Today’s Decision
Markets reacted very positively to the May CPI numbers that came out this morning. On a month-over-month and year-over-year basis, for both Core and Headline CPI, each figure was below expectations and below the prior month’s data. Going 8 for 8 in one direction or the other (with these comparisons) is a rare occurrence and it allows these figures to tell a more cohesive story – CPI inflation is coming down. Unfortunately, it still has a long way to go, as 3.4% Core CPI is a far cry from the Fed’s 2% target.
Additionally, we have yet to see a similarly compelling move in Core PCE inflation (the Fed’s preferred measure). The last release of PCE inflation data was two weeks ago, and at that time, all 4 data points were exactly as expected, and only one (month-over-month Core PCE) was below the prior month.
It is thought that “greater confidence” in inflation falling towards 2% implies a string of consecutive numbers all pointing in the right direction. So, if May’s PCE numbers (released later in June) align with May CPI, this would be a good start. But it may still be necessary for both the June and July PCE inflation data to follow a similar trend in order for greater confidence to be achieved prior to the September FOMC meeting.
Within the March SEP document, FOMC members largely stuck to their guns, as the Dot Plot forecast continued to imply a median expectation of 3 rate cuts by the end of the year. But now that the year is almost half-way over, the lack of progress on inflation in Q1 has been acknowledged directly in the FOMC statement, and the bar of greater confidence remains high. As a result, it is likely that this meeting’s SEP will reflect an adjustment to expectations of policy rate activity for the remainder of the year. But will the Dots shift from a median expectation of 3 rate cuts in 2024 all the way to 1, or will they shift from 3 to 2?
The Decision
The Fed Funds rate remains unchanged. It has been held at its present range of 5.25 – 5.50% since the July 2023 FOMC meeting.
New Economic Projections
The most significant changes to (or facets of) this quarter’s Statement of Economic Projections (SEP) document have been highlighted below:
- The median Dot Plot projection shows just one 25bp rate cut is projected for 2024
- The long-run Fed Funds target rate estimate increased to 2.75%, with 4 FOMC members raising their projections to 3.5% or higher
- Unemployment projections remained at 4.0% but increased 0.1% in 2025
- Core PCE inflation expectations rose 0.2% to 2.8% in 2024
The Statement
This meeting’s Statement contained a few minor amendments. The sentence referring to a lack of progress on inflation (which was added at the previous FOMC meeting) was amended to “modest” progress on inflation. Additionally, the language referring to QT was removed.
The Press Conference
Going into the press conference today, one of the most significant questions for Chairman Powell to answer was – did FOMC members consider today’s CPI data when coming up with their own Dot Plot forecasts? Powell clearly stated that FOMC members do have the ability to update their projections, so what’s in the SEP does reflect the data that was received today.
One reporter attempted to nail Powell down on defining greater confidence, asking if that meant three consecutive Core PCE inflation figures pointing in the right direction. However, Powell refused to define greater confidence, and continued to stress the Fed’s data-dependency, stating that they would look at the totality of the data (including potential weakening in the labor market) and that they would continue to make decisions on a meeting-by-meeting basis.
Powell also stated that supply and demand forces in the labor market have moved into a better balance, and that the labor market is in just as good of shape currently as it was before the Covid pandemic.
Bloomberg Intelligence’s NLP model registered Powell’s remarks as neutral, rather than particularly hawkish or dovish.
The Market Reaction
After this morning’s CPI figures were released, Treasury yields rallied significantly, with the 10-year U.S. Treasury Note declining as much as 15 basis points. After the FOMC announcement and Powell’s press conference, this rally was mitigated slightly, with yields rising around 5 basis points across the curve.
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