Post-FOMC, We See Higher Probabilities for March Cut Than Consensus
Our Views
- Investors largely took the FOMC statement and post-meeting press conference as a negative, seeing them as taking a March rate cut off the table. Markets started to tank around 3:01 p.m., right after Fed Chair Jerome Powell said, “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify that March is the time to do that.” He would later elaborate that “[March] is probably not the most likely case, or what we would call the base case.”
- We perceive such remarks as the Fed trying to herd the “hawks.” To us, the following Powell remark is more revealing: “We feel like inflation IS coming down […] what we are trying to do is identify a place where we are really confident about inflation getting back to 2%, so that we can then BEGIN the process of dialing back the restrictive level.”
- To us this means that the Fed is getting ready to cut → and this is a good thing. But Wednesday’s FOMC statement also tells us that the Fed and markets will continue to struggle with what that framework is.
- Bottom line: Overall, this FOMC meeting was a positive. At the same time, it also syncs with our view that markets will struggle with Fed timing in 1H.
In my view, clearly the most consequential comment by the Fed Chair at today’s presser was when Jay Powell said, “I don’t think the March rate cut is likely based on the meeting discussion today”. Of course, he gets fact-checked when the FOMC minutes are released on February 21. Note that the chair was well aware that many market participants have been talking about March cuts. Importantly, he reiterated that Committee participants are expecting three cuts this year.
Post-FOMC, We See Higher Probabilities for March Cut Than Consensus
On Wednesday, January 31, the Federal Open Markets Committee announced that it would keep its target-rate range unchanged at 5.25%-5.50%. Just as with its decisions since last July, this was in line with the market’s expectations.
The Federal Reserve had made a dovish pivot at the previous FOMC meeting on December 12-13, and investors responded accordingly. At the time, many anticipated cuts to begin as early as March: Fed futures trading in the first weeks following the meeting implied that the market had assigned a probability of around 75% to this scenario.
When the minutes of the December FOMC meeting were released on January 3, Fundstrat Washington Policy Strategist Tom Block noted the use of the phrase “peak for this policy tightening cycle.” In Block’s view, this was essentially code for “there will be no more hikes for this cycle”, despite other language included in the minutes so as to keep the Fed’s options open.
Nevertheless, the minutes, along with a series of public remarks by Fed officials that were widely perceived as hawkish, helped dampen earlier expectations of a March rate cut, with an implied probability of this event falling to below 40% this week. It spiked briefly on the morning of FOMC day, January 31, after New York Community Bank (NYCB -0.88% ) disclosed significantly higher-than-expected loan losses, raising fears of a renewed regional-bank crisis. As Fundstrat Head of Research Tom Lee noted, “Fed cuts [would] fix many of regional banks’ problems.” Arguably, traders thought this might influence the Fed’s thinking.
Expectations for a March cut quickly fell back to their subdued, day-earlier levels as Fed Chair Jerome Powell addressed reporters in the post-meeting press conference on Wednesday. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting, to identify that March is the time to [cut rates],” he said, later reiterating that “[A March cut] is probably not the most likely case, or what we would call the base case.”
Such remarks likely shaped the market’s hawkish perceptions of the press conference, but Lee has a contrarian view. “In my view, the press conference was very dovish,” he said. Several times, Fed Chair Powell explicitly acknowledged that “we have confidence” that inflation is coming down, and that Committee members are trying to “identify a place” where they might have enough confidence to cut. To Lee, these were dovish sentiments, as they suggest that the issue for the FOMC has shifted to “when” to cut, not “if”.
Yet, although Lee acknowledged that, on the surface, the Fed “threw cold water” at the idea of a March cut, he posited that even this was not as hawkish as many investors seemed to think. “In my view, the odds of a cut at the next meeting are higher than apparent market expectations,”
Lee said, adding “I think the Fed is herding the hawks” on the FOMC. As he has previously noted, some believe that inflation might resurge, perhaps due to higher stock prices driving up the financial services component of CPI, or due to Red Sea shipping disruptions driving up the prices of goods.
Powell could be trying to preempt any such fears in the event of a higher-than-expected inflation-data reading, Lee suggested. Lee also believes concerns of an inflation resurgence are overstated. As he previously pointed out, stocks have risen in the past without pushing up inflation. Furthermore, in his view, the central bank is unlikely to view the situation in the Red Sea as one that warrants or requires a Fed response.
The Federal Reserve will see two more CPI reports before the March FOMC meeting. “I do think the Fed will be surprised by downside inflation,” Lee said. Addressing Powell’s concerns about current services CPI levels, Lee pointed to his team’s previous finding that “the biggest driver of services CPI right now is auto insurance. Without auto insurance, the last Core services CPI would already have been 0.23%, which is right around the Fed’s target.”
New personnel
The FOMC consists of 12 voting members – the seven governors, the president of the New York Fed, and heads of four out of 12 regional Fed banks. The members of this last group rotate every year. Taking their place as voting members at Wednesday’s meeting were:
- Richmond’s Tom Barkin
- Atlanta’s Raphael Bostic
- San Francisco’s Mary Daly
- Cleveland’s Loretta Mester (who will retire later this year and be replaced on the FOMC by her successor at the Cleveland Fed)
The quartet replaced Chicago’s Austan Goolsbee, Philadelphia’s Patrick Harker, Minneapolis’s Neel Kashkari and Dallas’s Lorie Logan, who rotated out as scheduled.
