Our Views
- Going into FOMC day, equities had been drifting lower. Not unexpectedly, Wednesday marked a positive turning point for stocks. It’s worth noting that stocks have rallied in five out of the six previous FOMC rate decisions.
- To us, the Fed is still playing a waiting game, because housing (38% of the inflation basket) continues to lag what is seen in real-time measures.
- Bottom line, we think it’s important to stay on target. There continue to be reasons to be constructive in June, and we want to stick with what’s been working.
- Powell’s comments might have seemed more hawkish to some, given weak CPI earlier in the day having “teed things up” for a more dovish tone. Yet the key message seemed to be simply that the disinflationary trend seems to be happening more slowly, so they have the same trajectory for cutting rates – just on a delayed timeline.
- To me, the dot plot seems to be suggesting that the FOMC as a whole simply has no idea what’s in store, as four members suggested zero cuts, seven members said one cut, while eight said two cuts. So the difference between one cut and two cuts is just a single vote. Arguably, this is a confusing, bifurcated message.
- In my view, it seems unlikely that the DOT plot reflected Wednesday morning’s CPI and thus likely will be seen as a bit “stale”. This “stale” impression was further supported by Thursday’s soft PPI data, which to me makes the FOMC statement seem a bit out of touch. Notably, however, Powell did seem to suggest that 2.6-2.7% was a fine place to be. (i.e.. the Fed is not in a rush to get [inflation] to 2%).
- We received what in our view was a relatively hawkish dot plot, where Fed officials priced in one cut for the rest of this year and raised their longer-term inflation expectations. This reversed some of the gains seen in the crypto market.
- There is speculation over whether the committee was able to fully digest the morning’s CPI data and reflect it in their economic projections, but regardless, this was overall a hawkish data point.
- Importantly, however, there was no mention of an additional rate hike, which has been enough to keep the market buoyant to date.
- Even though it seems to me that Chair Powell wanted to tamp down rate cut expectations, I heard no hint of any rate increase. In fact, I found it interesting when he told a reporter in response to a question that, “No one has ‘increasing’ as part of their base case.”
- Continuing to tamp down expectations, Powell also made the point that the Committee needs to see more good data.
- Nevertheless, Powell acknowledged that today’s inflation report “was better than anyone expected,” and although the headlines seem focused on the reduction to one cut this year, he also clearly said they could change their position if data changes.
The Federal Open Markets Committee on Wednesday again voted to maintain its rate targets at 5.25% - 5.50%, as widely expected. There was perhaps a heightened sense of drama on Wednesday afternoon, because the Bureau of Labor Statistics (BLS) had released May CPI data six hours earlier. Following soft April CPI data, May Core CPI came in with, as Fundstrat Head of Research Tom Lee put it, “a huge downside reading” – +0.16 MoM versus +0.28% consensus. Super Core CPI (Core CPI excluding housing) came in negative for the first time since September 2021, driven in part by the beginnings of a rollover in the long-problematic auto-insurance component. This sent implied expectations for Fed cuts this year surging from 1.5 to roughly 2.0 ahead of the FOMC decision announcement.
Instead, the Summary of Economic Projections (SEP) featured a “dot plot” that implied median expectations of just one rate cut before the end of 2024 – not what would be expected hours after having seen May CPI data coming out the way that it did.
During the always scrutinized press conference following the meeting, Fed Chair Jerome Powell was asked whether members had changed their original forecasts after the CPI release. “We make sure people remember that they have the ability to update” in situations where an important data print is released during the meeting, he noted before acknowledging that “most people do not.”
This sparked a rhetorical question from Fundstrat Head of Research Tom Lee: “If that’s the case, then is the Fed truly ‘data dependent’” as it routinely asserts?
Lee characterized the results of the meeting as “sort of hawkish,” but during our research huddle, Fundstrat Washington Policy Strategist Tom Block observed that “nobody seems to be mentioning it, but I think it’s very interesting that Powell confirmed that none of the FOMC participants has any increase as part of their base case.”
Over the long term, the Fed arguably remains dovish. The SEP showed that 15 participants expect at least one cut this year (four expect no cuts and none expect a hike). Importantly, median expectations for 2025 for rate cuts increased from three to four, as illustrated below:
Nevertheless, looking further out, not much changed as a result of Wednesday’s FOMC. As Powell himself pointed out: “There are fewer rate cuts in the median this year, but there's one more next year. So really, if you look at year end 2025 and 26, you're almost exactly where you would have been before.
Organizational Note
The Federal Reserve Bank of Cleveland has named Beth M. Hammack as its next president. Hammack, a Goldman Sachs veteran, will assume leadership on August 21, replacing the retiring Loretta Mester. Mester has typically been viewed as leaning hawkish, and is currently a voting member on the FOMC. Hammock would take her spot on the FOMC for the remainder of the year, at which point the roster will rotate.
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