And labor market conditions are no longer easing. The reasons for further rate cuts — dropping inflation, weakening labor market — vanished. Pretty hawkish.
By Wolf Richter for WOLF STREET.
The FOMC voted unanimously today to keep the Fed’s five policy rates unchanged, as widely telegraphed, after 100 basis points in cuts over the past three meetings:
- Target range for the federal funds rate at 4.25-4.50%.
- Interest it pays the banks on reserves at 4.40%.
- Interest it pays on overnight Reverse Repos (ON RRPs) at 4.25%
- Interest it charges on overnight Repos at 4.50%.
- Interest it charges banks to borrow at the “Discount Window” at 4.50%.
A month ago, at the December meeting, the Fed had shaken up markets with the FOMC statement, press conference, and projection materials that had pushed back against rate cut expectations for 2025. The median projection of the FOMC members indicated only 50 basis points in cuts all year, in face of reheating inflation that had caused Powell to lament at the press conference: “We still have work to do though, is how we’re looking at it. And we need policy to remain restrictive to get that work done, we think.” And he then threw doubts on those two rate cuts in 2025.
Since then, the Consumer Price Index for December, released in mid-January, has accelerated further, with the month-to-month CPI accelerating to +4.8% annualized, the worst increase since February; with the three-month CPI accelerating to +3.9% annualized, the worst increase since April; and with the year-over-year CPI accelerating to +2.9%, the worst increase since July. The PCE price index for December, which the Fed favors, will be released at the end of this week.
The labor market has been relatively solid, though it has cooled from its overheated state after the pandemic. A weakening labor market would provide urgency for rate cuts, but that’s not the case; that was the case briefly over the summer, which had triggered the 50-basis-point cut in September, but that data was upwardly revised, and the data points that followed were decent, and turns out, the labor market is just fine.
With inflation accelerating again, and the labor market on reasonably solid footing, the Fed pivoted back to wait-and-see.
QT continues. The Fed has already shed $2.11 trillion in assets since it started QT in July 2022, and according to the FOMC’s Implementation Notes today, will continue to shed Treasury securities and MBS as outlined in May.
It was a no-dot-plot meeting. Today was one of the four meetings a year when the FOMC does not release a “Summary of Economic Projections” (SEP), which includes the infamous “dot plot” which shows how each FOMC member sees the development of future policy rates. SEP releases occur at meetings that are near the end of the quarter. The next SEP will be released on March 19 after the FOMC meeting.
What changed in the FOMC’s statement:
New: “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.”
Old: “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low.”
Meaning: Labor market conditions are no longer easing.
New: “Inflation remains somewhat elevated.”
Old: “Inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”
Meaning: No more “progress toward” the 2% objective, as inflation has been rising recently.
New: “…decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.”
Old: “…decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 percent.”
Here’s my discussion of the FOMC post-meeting press conference: Powell: In “No Hurry” to Cut, Need to See “Further Progress” on Inflation, No Timeline to End QT (Not Even Close)
The whole statement:
“Recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
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Ohh…someone at the top is not going to like this.. especially since he’s been going around demanding lower interest rates…will get my popcorn ready..
Push come to shove though, I expect only one will come out with what he wants, too bad, looks like my T bill and chill strategy will have to change soon.
Would that “someone” be the same guy who decided last week that gov. statistics could not be released/published until one of his political appointee’s reviewed them ? ?
Oh one and only, the non shadow one, although the shadow one probably love lower interest rates as well, so at least they are aligned on that topic
Even if the FOMC were able to resist political pressure to lower rates this year, vacancies start opening up in 2026. President Trump will be able to appoint a new governor next January, new Chair in May, and a new Vice Chair for Supervision in July.
If he wanted to appoint doves who were hell bent on easing no matter the economic data, the only remaining checks on his power are the Senate, and finally Treasury investors.
If Trump does this, the result will be called Trumpflation. And people are going to hate it, just like they hated Bidenflation. Americans HATE HATE HATE inflation. Biden got trounced in part because of inflation.
The issue is that inflation increases/declines with big delay after bad decisions. People hate inflation, but often fail to make connection between long-term cause and effect, often blaming wrong people. By the way, goverment budget deficit is also huge inflation contributor and no politician talks about realistic ways to reduce it.
Have a listen to hearings today.
Trump or the Big Pharma dems.
I’ll take Trump over what I heard from
Warren, Bernie, and Whitehouse.
Not the blue collar party I grew up with.
Much more like the shock collar party.
What the Fed probably wanted to say but could not in order to not inspire an online meltdown from Trump is that a combination of high tariffs along with deportation of migrant workers that keep down the price of things like groceries in our country is a major consideration for what comes next. If Trump goes forward with his policies, we are likely to see lower growth and higher inflation, the worst combination we can ask for. Until the Fed knows what he actually does, the best plan of action is to wait and see, which is what the Fed has done. (the Canadian fed, not so restrained on what they can say, has said the above this morning)
It’s a weird combination of policies that will restrain growth like tariffs and deportations and policies that will expand growth like tax cut extension and deregulation. I don’t think anyone can know how this will play out with regard to inflation, but the Fed cutting rates 100 basis points in the last 6 months and cutting back QT for essentially no reason is unquestionably not helping with regard to inflation, they should pretty clearly not have cut rates, and it’s as least as likely that the next move should be an increase instead of a decrease.
I wish you were asking questions to Powell, especially after he said the last 2 reports have been “GOOD”
You said, “Since then, the Consumer Price Index for December, released in mid-January, has accelerated further, with the month-to-month CPI accelerating to +4.8% annualized, the worst increase since February; with the three-month CPI accelerating to +3.9% annualized, the worst increase since April; and with the year-over-year CPI accelerating to +2.9%, the worst increase since July.”
I would LOVE that
Yes, that was kind of funny. Maybe he misspoke.
He even gave estimates of Dec PCE inflation to be released on Friday, which were not at all “good”:
Overall PCE price index: +2.6% (up from +2.4% in Nov)
Core PCE price index: +2.8% (also +2.8% in Nov)
So there was nothing “good” about his PCE comment. His other comments on inflation didn’t include “good” either, but noted that inflation was elevated, too high, and hasn’t gone down further recently, but that they hoped it would eventually come down further.
He said many times, including when challenged on a March rate cut: “policy is in a good position, we’re in no hurry to make adjustments.” This essentially took a March cut off the table if inflation and the labor market stays as is.
So “Hopium” will be served at further meetings? As a side dish or main course?
“…but that they hoped it would eventually come down further.”
IF inflation continues to accelerate, and means it (this is not certain, inflation has come down a lot, and could go down again), the Fed’s stash of hopium will eventually run out and then you’ll see rate hikes re-appear on the menu.
I don’t think he misspoke. We should take his words at face value otherwise it’s us on the Hopium. Powell believes that 2.8% inflation is “good.” 2% is no longer the target, there’s a new unspoken target of 3%.
With all the potential job cuts in the government jobs there could be quite a bit of stress in housing once these people can’t pay their mortgages and rent. They are freaking out on the DC area sub-reddits, and probably don’t realize how bad the job market really is.
A friend was on the IT job hunt recently, and if it wasn’t for another friend telling me ahead of listing of an opening I think my friend might of been forced to sell his house. There are lots of job listings out there but many of them seem to be fake. Maybe to make employees believe the company is healthy, or maybe software scans open job listings as an input to stock buy/sell logic.
Friend took a pretty large pay cut going to work for the other friend, but it stopped the bleeding. The market won’t absorb a ton of gov/contractor layoffs well.
Well it might be just what we need. Softening of the white collar job market (sobering up the drunken sailors) and tightening of the working class job market due to mass deportations (raising wages for the lowest income earners).
Vegetables are going to be pretty expensive once you have to pay $20 or $30 an hour to pick them IF you can find someone to do it at all. It’s going to get a lot worse before it gets better!
Amazing that America figured out how to grow crops and feed itself before 2008…
Don’t worry!
AI programmed robots will do all the harvesting and processing of those veggies! /s
Maybe we’ll finally get a sensible guest worker program. The lack of immigration reform over many decades only benefits one class of people.
yeah it makes a lot more sense to bring in illegals at $8/hour and then pay $20,000 a year per child to educate their children. what a deal!
Ten Commandments movie of how Pharoah fixed a field labor shortage: “Your women and children will glean the fields for stubble at night.” The brilliance of complete employment as well as starting a second shift.
???
You can’t be suggesting that migrant labour in ag began in 2008?
See: Strawberry Fields by Miriam J. Wells | Paperback
Cornell University Press
Strawberry Fields: Politics, Class, and Work in California Agriculture by Miriam J. Wells.
Published in 60’s.
Actual strawberry picking is avoided by Hispanic Mexicans and usually fell to Mestizo Indians based in Mexico. Don’t know who does it now but not guys like us.
Apple picking is luxury by comparison but an orchard owner said white US pickers last about 2 hours.
It’s also possible that using illegal labor only benefits the plantation owners by enabling margin expansion.
Kinda like in homebuilding. Ever growing margins thanks to zirp, illegal labor, favorable government policy (fannie/freddie, fed purchase of MBS). All of those things *should have* helped bring the price of a house down. Instead, of course, they jacked the prices thru the roof, and were pinching themselves at how fat those margins became.
Did we have labor shortage pre covid before we let millions of illegal immigrants in ?
A genuine question
Not just gov’t jobs, that money rolls down into hundreds of thousands of companies. We were told to to stop work this morning, only to restart within a few hours.
I was kind of looking forward to some time off, but not losing my job entirely because nobody can plan. Business risk is extremely high for anyone receiving federal funds. Call it waste if you want, but it’s also mortgages, rents, and car payments.
And I already see a headline “stocks *tumble* as rates held steady.”
The indices are nearly flat on the day. JPow must’ve said something markets liked too, any little dip is being erased. BTC is up a few percent.
The rates will stay high. Either interest, inflation or all the above. For looonger.
The bond market reacted favorably to the Fed’s renewed focus on inflation. The bond market needs confidence that inflation will go down and stay low for the term of the bond. A vigilant Fed is good for bonds (lower yields), a laxist Fed is bad for bonds (higher yields).
The Fed’s renewed focus on inflation may be the Fed’s way of trying to contain the surge of long-term yields.
There was another thing Powell said today right up front in that vein: The Fed will not review its 2% inflation target during its current discussions of its monetary policy framework, which it does every 5 years. This moved (again) the issue of raising the inflation target off the table. Raising the inflation target would be a horror show for the bond market.
You mean the “2% target” they have now been well above for almost 4 years? Let’s face it, actions speak louder than words, the Fed can say whatever they wish, the new normal is higher inflation, and it might last several more years at this rate.
“the new normal is higher inflation, and it might last several more years at this rate.”
Yes, exactly, but Wall Street has been clamoring for the Fed to raise its target to where inflation is so that the Fed quits being hawkish. Wall Street isn’t going to get what it wants, the target remains at 2%, and inflation does what it does (higher forever?), while the Fed keeps trying to keep it from going too high. So the target stays at 2%, inflation stays in the range of 3-5%, and policy rates stay in the range of 3.5-5.5%, like for many years. I’m just making this up, obviously, but this is a possible scenario.
They can let inflation go as high as they want as long as there’s demand for Treasuries at reasonable yields.
If the Fed can keep the bond market in check by saying they have a 2% target, but not actuallly letting inflation get that low, it’s a win-win.
“A vigilant Fed is good for bonds (lower yields), a laxist Fed is bad for bonds (higher yields).”
Indeed, I recently sold the last of my TLT puts in anticipation of this. Rates on duration will probably take a breather with the Fed’s renewed focus on inflation.
I guess we’re lucky he didn’t cut again.
I wonder if rising inflation is transitory anymore?
Funny how the debt ceiling “breach” has mostly disappeared from the headlines….No rate relief for the new Treasury secretary.
Not sure what average duration is on the overall outstanding is, but I remember it being pretty short. 7 Trillion in roll overs this year plus 2 trillion more in new debt. Seems like debt service costs can only go higher this year.
We need to (a) do what we can to stop making the debt situation worse while (b) boosting growth and actual production. If DOGE can succed in simply holding budget growth to 0, that would be an amazing accomplishment.
Meanwhile, I think about “investing” and wonder if I’m not better off just collecting 4.25% from Treasuries in my tax deferred accounts.
Looking at buying a rental property….but at rents that are reasonable to pay based on average income around here…it’s hard to pencil out a 3% return paying cash for the house – never mind if I’d want to take on some debt. That same money earning in Treasury Direct makes me skeptical about a real estate purchase. House prices around here need to decline another 25% for the numbers to work.
Without wading too far into politics, it’s a well known fact that the debt ceiling is only a problem when one particular party is in power.
I believe the new Treasury secretary wants to normalize issuance – fewer bills and more coupons. But this could put upward pressure on the long end of the curve.
4.25% risk-free and work-free seems like a better deal than becoming a landlord right now.
This reminds me: There has been some discussion at the Fed in 2024 about replacing maturing notes, bonds, and MBS passthrough principal payments with T-bills (which we discussed here). So the Fed would walk away further from notes and bonds and MBS but absorb lots of T-bills, just to get back to how it used to be (balance sheet of mostly T-bills). Over time, something like $4 trillion in T-bills might end up on the Fed’s balance sheet, after $1 trillion of additional QT and if it replaced most of its remaining notes, bonds, and MBS with T-bills. But there are only about $6.5 trillion in T-bills out there right now. So Treasury would need to issue a lot more T-bills to accommodate this $4 trillion in new demand over time. The Fed would walk away from notes and bonds, but issuance of notes and bonds would also be lower by $4 trillion in favor of T-bills. QE messed things up royally, and it will take years to clean it up, and during that time, there will be lots of shifts with quirky results.
Wouldn’t that push down T-bill rates and potentially cause MMFs (and other bill buyers) to rotate back to the RRP? Not that that’s a bad thing, just not something I would have expcted with the continuation of QT.
Quirky is a good way of putting it.
Over/under until the next tweet about rates being too high from the “current administration”?
The FOMC caved last time, when they clearly should not have. This will be interesting, to see whether Powell has the same exhaustion that many do, and just caves again, or ignores the pressure.
This time he’s trapped though. The fed can cut if pressured, but they only control short term rates. The 10yr will go up to compensate for the anticipated inflation, then so will the cost of long term loans (mortgages, business loans)
unless he really buckles to pressure and resumes printing. that’ll drive the 10 year down substantially, albeit unleashing monster inflation.
Just curious – if that scenario occurs, would long rates still go up due to exploding inflation fears, or would any large scale bond buying by the fed offset that no matter what, causing rates to go down? I guess I’m asking, with inflation where it’s at, is this time different.. than the prior decade when qe didn’t trigger inflation.. until it did?
Printing wouldn’t drive the 10 yr down. Printing creates higher inflation and higher inflation drives the 10 yr up.
The reason the 10 yr was low when they were printing previously is because inflation was low/the fear was recession. Then later because they thought inflation was transitory. Then as we raised rates it was assumed the fed was going to get inflation under control and that neutral long term rates is lower than it appears to be now. Now that it’s looking like inflation is coming back and the feds not controlling it and was even cutting into it, the 10 year is going up.
“would long rates still go up due to exploding inflation fears, or would any large scale bond buying by the fed offset that no matter what”
The Fed is not trying to copy the BoJ thankfully. I don’t think we have to worry about that scenario.
When will the Fed begin using real time shelter costs? Inflation figures are overstated due to the way they factor these in.
BS.
CPI, PCE, and therefore the Fed which looks at CPI and PCE, use the metric for rent that tracks the actual rents that tenants are actually paying in a large set of housing units (multifamily and single family), and how those actual rents change over time. The large sample of housing units around the US stays the same, while tenants change. So you get an accurate measure of “actual” rents being paid by actual tenants in the same housing units over time.
With your “real time shelter costs,” I suppose you’re referring to “asking rents” on vacant housing units on the market as tracked by Zumper, ApartmentList, Zillow, etc. But by definition no tenant paid those asking rents because these are vacant units without tenants. It’s what landlords want to collect for their units. Asking rents exploded a few years ago, but actual rents moved up more slowly and not nearly as far because actual tenants didn’t pay rent on vacant units. Asking rents are just an imaginary fanciful landlord figure. And that’s fine. But using asking rents in inflation measures is a sign of cerebral malfunction.
Read this article with this chart:
https://wolfstreet.com/2025/01/15/beneath-the-skin-of-cpi-inflation-yoy-cpi-2-9-yoy-worst-since-july-mom-cpi-0-39-4-8-annualized-worst-since-february-core-cpi-stuck-for-7th-month-at-3-1-3-3/
The chart shows:
Blue, left scale: CPI Rent of Primary Residence as index value, not percentage change, reflecting actual rents that actual tenants actually paid.
Red, right scale: Zillow Observed Rent Index in dollars, reflecting “asking rents.”
The left and right axes are set so that they both increase each by 55% from January 2017:
“But using asking rents in inflation measures is a sign of cerebral malfunction.”
Facts.
It’s the clearing price that matters, not the asking price.
But rent inflation isn’t the clearing price. Rent inflation is the rent increase that ALL tenants experience, not just tenants that moved into a new rental. Rent inflation includes rent controlled units, it includes tenants that have lived in the same rental for decades, it includes all rentals that have tenants in them that are paying rent.
The Bloomberg talking heads said, essentially, we have a fairly good economy in search of a solution for a non-problem…
The 100 basis points in cuts over the past 3 meetings were incredibly reckless. A pause is certainly better than another cut, but a 25 basis point hike would have been a much better decision to get out in front of the resurgent inflation and send the message that they intend to snuff out inflation for good, especially considering the labor market and all of the excess liquidity sloshing around and running up prices. It would also have boded well for Powell’s legacy, which at this point is almost tarnished beyond repair.
Can you imagine the apoplectics from the new president if the Fed had raised rates?!?
I think it would be hilarious, honestly. That’s one thing he’s dead wrong about, lowering rates. Wasn’t he complaining when the FED was cutting for the clown before him?
DC – but long rates went UP in response to those cuts. The yield curve has actually started to normalize.
Because we all know the Fed is forward thinking! ;-)
Wolf I am still all in on $TRUMP coin alongside my previous mentioned fidget spinner hedge
Not surprising. As Wolf has highlighted, the yield curve continues to normalize and the Fed is not all powerful. Interest rates are going up and they do not want to appear like they have lost control. The Fed is really all about perception. After all. business needs to get done and those funding/investing in (not gambling) business are demanding a higher risk premium.
Come on don’t worry this is probably just another bout transitory inflation.
It’s just transitory inflation.
Powell is always good for a few laughs. The Fed doesn’t know what the f is going to happen with the economy. Nobody knows. That’s what makes the world go round. Life would be very boring if we knew too much about the future. Death and taxes, as they say, are about all we know for sure.
With many of the TCJA provisions set to expire this year, not even taxes do we know for sure.
With Republican control of the Presidency and legislature, the TCJA will certainly be extended. The only question is if the cuts will be extended to include things like tip income or SALT deductibility.
Also elimination of tax on ss, I’ll be looking forward to that in a few short years.
Empires in slow decline are not pretty to watch. Obviously a lot of various things will be tried, monetary policy, tax cuts, reducing the Federal work force, tariffs and so on. Nothing points to that things will get better for the majority of Americans and most signs point to gradual decline. It is an amazing time to watch it and looking in retrospect it is clear but Captain Hindsight gets no prize. The country needs a reset and a New Deal but of course literally no will to do that at all as the reverse is happening as they try to slowly strip gains away.
on the other hand it takes a long time to turn around an empire in slow decline. Just dealing with inflation it’s been years and it likely will be at least a couple more.
Some Bozo (your guys probably know him) recently said he’s going to demand lower interest rates. I guess he thinks he’s an emperor. “Hail Caesar!” Anyway, Wolf man will probably disagree with this, but neither Caesar nor the Fed should determine (fix) interest rates. That is price fixing, since interest rates are the cost of money. Interest rates should be determined by the free market (the bond market). It’s amazing Caesar didn’t say he’s going to demand lower egg prices as well (or EV prices).
With its policy rates, the Fed only brackets short-term interest rates, such as overnight rates. Rates for a few months to some extent reflect those overnight rates. But long-term rates are determined by the market, which is why long-term rates spiked by 100 basis points as the Fed cut by 100 basis points.
It’s these long-term rates that matter most for the economy.
QE was an effort to manipulate long-term interest rates. But QE ended in 2021, and there has been QT since 2022.
Marcus, not Neiman,
Honestly Caesar did great things for the people. Land reforms, hiring Romans with real wages and so on. He would by today’s standard be leftist.
Wolf, I just want to say how grateful I am for what you do. You are the only light on the mountain regardless of markets that tells it how it is. Literally the only truth.
Overheard a lady the other day saying that 18 eggs at Wally World were $11. She then followed that statement with “No wonder people steal!” Now, eggs might be somewhat of a special case, but I do shop a lot (as most of us do) and groceries are VERY expensive. In one store, I saw a 12 ounce package of coffee (not organic) from Vietnam – $18.50! I almost fell over.
I buy 3 pounds of Colombian Supremo whole bean dark roast (which I love) for about $14 at Costco ($4.70 a pound). You can easily spend $100 a pound for coffee, if you try. I’ve seen stories of specialty coffee for over $1,000 a pound, but it’s up to you. I like to buy 3 pounds of coffee I love for $14, or about $4.67 a pound. It’s just like you can spend $120,000 for a pickup truck, if you wish. But you don’t have to.
We are all drunken sailors at heart.
I’m spending less on coffee than I ever have in my life because I always make it at home.
45 oz tubs of Dunkin grounds $22 at Costco. I get about 50 pots of coffee per tub so cost of $0.44 per pot of coffee.
10 years ago I could get a medium coffee at Dunkins for $1.19, but even that was much more expensive.
Do they sell Mayorga at your Costco? They have a couple of great whole bean versions that are very good for what I think* is around the price you stated. They go on sale, too!
But… Is paying $0.25 more per cup (question posed by Fox News today) worth it, in order to keep Columbians migrants out of our country? Only $0.25 a cup!
I’m not worried. Powell is out and Jesse Waters is ready to take charge and Make Interest Rates Great Again.