Fed Watch - Fed shows restraint amidst policy frenzy
The Fed kept rates on hold today, leaving the upper bound of the federal funds rate at 4.50%. The decision was widely anticipated, and as a result nobody questioned or pushed Powell on the decision during the press conference. The update to the press release was initially interpreted as hawkish, as the 'progress toward' the inflation objective part was removed. Powell dismissed this, and simply attributed it to cleaning up the language, removing references to the first half of last year.
In contrast to the almost lack of interest in the monetary policy decision, there was a lot of interest in Powell's views on the new Trump administration. Powell was generally diplomatic, making it clear that it was not the Fed's role to criticize or praise policy of elected officials. Rather, as in any new administration, the Fed is in wait-and-see mode for details on the actual policy, and Powell indicated the four key areas the Fed is tracking are tariffs, immigration, fiscal and regulatory policy. He sees an increase in short term inflation expectations, possibly related to tariff expectations, but stressed that long-term expectations remain well-anchored, which is what matters to the Fed. Nobody dared ask him whether the next move might be a rate hike. Powell did comment on the fact that he saw elevated levels of trade policy uncertainty have a negative effect in 2018-2019, but didn't think we were at that point yet. He acknowledged monetary policy uncertainty is at elevated levels, but consistent with usual dynamics around new presidencies, nowhere near the great financial crisis or pandemic. Powell confirmed he had not yet actually been in contact with President Trump, and as such he has not been asked to lower rates. He stresses that the public should keep faith in the independence of the Fed. 'We keep our heads down and we do our work.' As for the state of the economy and monetary policy, Powell described today's choice as the current rate being well positioned for the overall strong economy, with significant progress on inflation and a generally solid labour market. He stressed on multiple occasions to not be in a hurry. For further easing to even come into consideration, 12-month inflation needs to make significant further progress towards the target, though it does not have to be at target. He singled out housing inflation as a component that was showing sustainable progress. As usual, a significant weakening of the labour market was given as another potential reason to resume easing. When discussing potential weakness in the labour market, he described how the weakening of the labour market is largely absorbed by weaker immigration, which is likely to continue into this year. The now lower level of job creation is close to a lower break-even rate, putting little upward pressure on the unemployment rate, a mechanism we predicted last summer when modelling the . What does this mean for future rate developments? Overall, Powell made it abundantly clear that the Fed is in no hurry to further ease. Policy is 'well calibrated' as the current level of restrictiveness is unlikely to push the labour market into much cooler territory, while still contributing to the disinflationary process. A March cut is probably seen as less likely now compared to before the meeting. At the same time, we continue to think the labour market is weaker compared to what Powell described during the press conference. Job gains are concentrated in a limited number of sectors, more part-time than usual, and the hiring and quits rate are low. The freeze on government hiring - one of only three sectors that did any significant hiring last year - is likely to show up in the data before the next meeting. The weaker labour market, combined with progress on disinflation due to more benign readings and tailwinds from base effects, may still call for a rate cut.