Our Views
- We saw the FOMC meeting as dovish.
- The Fed talked about slowing QT, which we see as a dovish move; it reiterated its confidence and its base view that inflation is going to fall throughout the year, and it noted that strong labor markets do not preclude the possibility of rate cuts (in contrast to worries that some hawkish folks had). The Fed also expressed puzzlement at the stagflation narrative, pointing out the current low unemployment and healthy economy.
- Importantly, the Fed also did not indicate that it’s even thinking of a hiking bias. Keep in mind also that in our view, the Fed is still dovish even if there are no rate cuts – even in a higher-for-longer scenario, that’s still a Fed that does not want to actually increase rates, and that’s a positive to us.
- The market did not necessarily respond to this dovishness in a sustained, positive manner on Thursday, but I think this is going to be priced in over the next week or so.
- Chair Powell’s remarks indicate to me that the Fed’s bias is still towards easing rates, along with a quicker tapering of Quantitative Tightening (QT) starting in June.
- The market moved when he said that they were going to start tapering QT a lot more aggressively and sooner than what the market expected, and I think that is very dovish. To go from a runoff of the Treasury balance of 60 billion to 25 billion a month is arguably pretty substantial. To me, that is a bullish factor for Treasuries, and in response we saw yields pull back very sharply along with the dollar.”
- This FOMC message clearly looks to be a more dovish message than the market was expecting. This has combined to send Treasury yields and the US Dollar towards lows of the day.
- The Chair as always emphasized data dependence and emphasized that it appears that it will take longer than he had anticipated to gain confidence that inflation is headed towards 2%. As in the past, he made clear that the Committee needs confidence that inflation is headed toward 2%, rather than needing to actually achieve 2% before cutting.
- I think without a doubt that the headline statement from Powell was his assertion that it is “unlikely the next move will be an increase.” The Chair and the staff knew that he would be asked about the chances of a hike, what might cause a hike etc., and to me, it was clear that Powell’s response had been well-rehearsed and intended to pre-empt that line of questioning.
FOMC Maintains Dovishness, Sees Neither "Stag" Nor "Flation"
Fundstrat Head of Technical Strategy Mark Newton has noted on various occasions that the Federal Reserve under Chair Jerome Powell’s leadership has sought to avoid surprising or shocking the market, typically telegraphing its intentions ahead of each meeting of the Federal Open Market Committee (FOMC). This proved to be the case once again in the weeks and months leading up to the most recent FOMC yesterday (May 1).
At the beginning of 2024, the market had hopes that rate cuts might begin as early as March. That obviously did not happen, and since the previous rate decision, various Fed officials have signaled that there would be no cuts this month either.
Whether it was the San Francisco Fed’s Mary Daly suggesting that the first rate cut was “not going to be tomorrow, but it’s not going to be forever,” Loretta Mester of the Cleveland Fed telling a reporter that “I do not expect I will have enough information by the time of the FOMC’s [May 1] meeting to [warrant support for a rate cut]”, or New York Fed President John Williams telling a conference audience on April 18 that “I definitely don’t feel urgency to cut interest rates,” the message was clear.
After all, as Powell himself had said on April 3, “we have time to let the incoming data guide our decisions,” reiterating a message he had conveyed for months. Nonetheless, he also confirmed that a recent string of hotter-than-expected readings of inflation metrics “do not, however, change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.” Consequently, while some on the Street worried ahead of the May 1 meeting that the FOMC might pivot hawkishly and introduce the possibility of rate hikes, Fundstrat Head of Research Tom Lee predicted that the Fed would remain dovish.
As expected, the FOMC left rates unchanged on May 1, and with the FOMC not providing Summary Economic Projections (SEP) and accompanying dot plot after this meeting, all attention fell on Powell’s statement and remarks during the customary post-meeting press conference. Lee’s unequivocal assessment after listening to Powell: “The hawks were wrong. The Fed remains dovish.”
For both Lee and Head of Data Science Ken Xuan, one highlight from the press conference was Powell’s response to a question about stagflation. Powell responded, “I don't really understand where [talk about potential stagflation] is coming from […] I don’t see the stag, or the 'flation,” he quipped.
Xuan said, “I thought his response was very telling,” finding it noteworthy that the Fed Chair had countered by observing that compared to the stagflation of the 1970s and early 1980s, current unemployment and inflation are significantly lower while economic growth remains far more robust.
Newton saw the FOMC meeting similarly. “The Fed had a chance to pivot and get more hawkish yesterday, and they chose not to do so. In my view, this shows that the Fed is much more worried about growth risks than upside inflation risks, and that's very important.”
The Fed also has an eye on the labor market, but when asked whether continued strength in the labor market might preclude rate cuts, Powell was clear in his rejection, noting that “I just want to be careful that we don’t target wage growth or the labor market.”
Observed Lee, “I think that’s something hawkish folks have been worrying about, but that’s not how the Fed sees it.”
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