So far, vice chair Williams, Mester, Bostic twice already, and even Goolsbee who accused markets of wishful thinking.
By Wolf Richter for WOLF STREET.
All heck re-broke loose in the markets last Wednesday after the Fed announced that it would keep its five interest rates steady, with the top at 5.5%, and with the “dot plot” in its Summary of Economic Projections (SEP) showing that 11 of the 19 participants expected three or more rate cuts in 2024 while 8 expected between zero and two cuts, which put the median therefore at three rate cuts in 2024. But trading in the options market implies six rate cuts in 2024 – double the median projections.
Alas, for most of 2022, the dot plot projected rate cuts in 2023; and then in the December 2022 dot plot, those rate cuts in 2023 vanished.
The Powell-was-dovish meme started in May 2022 and swamped the internet after every single FOMC meeting, no matter what Powell actually said. Markets have been betting on rate cuts ever since the Fed started hiking rates. And those Powel-was-dovish memes and rate-cut bets were followed up by subsequent rate hikes all the way to 5.5%, and markets have been wrong with their rate-cut bets in 2022 and 2023, and so that’s nothing new.
What’s new is the magnitude of the fires that ensued in the markets, and so Fed members fanned out to douse those fires, starting with Fed Vice Chair John Williams on Friday with his line, “We aren’t really talking about rate cuts right now.”
Today, it was the turn of Chicago Fed president Austan Goolsbee, who said in an interview on CNBC that he was “confused” about the markets’ interpretation of Powell’s remarks last Wednesday, that those interpretations were essentially wishful thinking.
When he was asked what the Fed did on Wednesday, what the change of policy was, he said: “We voted not to raise rates,” he said. “Policy change was, No Change. We kept rates where they were.”
“The data on inflation is the key thing that we missed in our mandate, and the key thing that should drive our decision making is on inflation,” he said. We have seen significant improvement on the inflation front, bringing us back closer it looks like to our target. And that’s reflected in the SEP dots.”
When he was asked if there was still a bias to hike after the word “any” was added to the statement (“In determining the extent of any additional policy firming…”), Goolsbee said:
“If we get improvement on inflation, that we’re clearly moving to target – and we’re still not there yet, we still need to see these markers – if we get inflation back into the range of our dual-mandate goals, then we’ve got more symmetric concerns, let’s call it, about both sides of the dual mandate,” he said.
When he was asked about what the market “heard” in reaction to the meeting, he said:
“It’s not what you say, or what the chair says. It’s what did they hear, and what did they want to hear. I was confused a bit; was the market just imputing, here’s what we want them to be saying? I thought there was some confusion how the FOMC even works. We don’t debate specific policies, speculatively, about the future. We vote on that meeting. And we voted at that meeting not to raise rates, we put out an SEP that forecast for next year that the individuals on the FOMC collectively thought conditions are going to be not a recession and inflation is going to be coming down, which would allow us to reduce the restrictiveness. And it’s hard for me to get into the head of where the market is. I think it’s best to remember the old Volcker lesson: our job is to act, and their job is to react.”
Also today, Cleveland Fed president Loretta Mester, a voting member of the FOMC in 2024, came out in an interview in the Financial Times to douse those rate-cut fires.
“The next phase is not when to reduce rates, even though that’s where the markets are at,” she said. “It’s about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%.”
“The markets are a little bit ahead,” she added. “They jumped to the end part, which is ‘We’re going to normalize quickly’, and I don’t see that.”
On Friday, it was New York Fed president and Fed vice chair John Williams who, in an interview on CNBC, trampled all over those rate-cut fires:
“We aren’t really talking about rate cuts right now,” he said. “We’re very focused on the question in front of us, which as chair Powell said… is, have we gotten monetary policy to sufficiently restrictive stance in order to ensure the inflation comes back down to 2%? That’s the question in front of us.”
When he was asked about futures pricing for a rate cut in March, he said, “I just think it’s just premature to be even thinking about that.”
“It is looking like we are at or near that in terms of sufficiently restrictive, but things can change,” he said. “One thing we’ve learned even over the past year is that the data can move and in surprising ways, we need to be ready to move to tighten the policy further, if the progress of inflation were to stall or reverse.”
“We’re definitely seeing slowing in inflation. Monetary policy is working as intended,” Williams said. “We just got to make sure that … inflation is coming back to 2% on a sustained basis.” (We linked the CNBC YouTube video of the interview in the Wolf Street comments).
Also on Friday, Atlanta Fed president Raphael Bostic, a voting member of the FOMC in 2024, gave two interviews to step out those rate-cute fires, one with Reuters, and the other later in the day with Marketplace, which aired on NPR.
In the Reuters interview, Bostic said, that he sees two rate cuts in 2024, starting “sometime in the third quarter” if inflation continues to drop as expected.
“I’m not really feeling that this is an imminent thing,” he said, and policymakers still need “several months” to accumulate enough data and confidence that inflation will continue to fall before moving away from the current policy rates.”
He expects core PCE inflation to end 2024 at around 2.4%, which would be enough progress towards the Fed’s 2% target to justify two rate cuts in the second half of the year.
Bostic told Reuters that he will be cautious about cutting rates too soon. “We’ve been getting close to the neighborhood” in terms of the three-month and six-month core PCE readings, he said, but “I am going to try not to presuppose anything at this point,” he said. “We’ve been surprised throughout the pandemic on a number of fronts, some to the good and some to the bad.”
In the Marketplace interview, Bostic said: “I use the words patient, cautious and resolute. And this is the time when we’ve got to be resolute, and make sure that we don’t jump to conclusions and declare victory. Look, there’s still a ways to go.”
“And you know, headline inflation is a little above 3%, core is above 3%. And our target is 2%. So we need to really make sure that we’re well on our way. And when we do that, then I’ll be feeling a lot better. But I don’t feel like we’re there right now.”
And he affirmed what John Williams had said on CNBC earlier on Friday: “I’m actually where John is on this. I’ve been saying for a long time, we need to be willing and comfortable being higher for longer.”
“For me … the time when we would consider dropping rates is really still Quarter 3 of 2024. That’s in my outlook, that’s what I have in mind if inflation proceeds as I expect it will.”
“I’m not looking for anything or expecting anything imminent to happen. We’re just going to let the economy keep running and make sure that inflation is well on its way to 2%,” he said.
“But you know, financial markets were talking about us cutting last year  or this year , and that didn’t come to pass either. So we’re kind of in a push on this. And we’ll see sort of where things progress in the early part of 2024.”
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