Harkster Fed Preview - 30 Apr
Today’s focus... it's not in Powell's nature to out-hawk mkt expectations
Today’s focus…
Consensus
Dovish Surprise
Hawks?
Has the Fed run out of runway to cut in 2024?
… but that doesn't mean a hike is coming...
Would a cut reduce inflation...? What if Erdogan was right?
What's in the price?
14 previews from our curated Fed channel on Harskter.com (your research inbox)
Consensus:
Guided by 3 hot inflation prints, robust activity data and the shift in tone from committee members, Powell will deliver an incrementally hawkish message. However, it's not in Powell's nature to out-hawk mkt expectations. Will the excessive USD longs be disappointed with a message that simply marks the board to market?
I personally can't see him committing to the next move being a hike, instead he will acknowledge that there is more work to do on inflation, progress has slowed (due to seasonal Q1 factors) but is still ongoing and of course bang the "data dependent" drum. Once inflation is still believed to return to 2% over the forecast horizon, why should he deviate with every pop in spot inflation?
Thus, my base case is a repeat of his Apr 17th comments “the recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence.” Inflation is elevated but there is enough for him to indicate that it is still moving toward the central bank’s 2% target, especially if they keep rates high “as long as needed.” Policy will be steered by inflation as the jobs mkt moderates.
There will be no SEP, the dot plot with 3 hikes won't be updated until June 12th meeting. Finally, expectations are for a QT adjustment given the discussion had started during the March meeting according to the minutes. Implementation most likely to start in June however it could be immediate.
Dovish Surprise
Copy and paste recent statement = patiently data dependent.
Keeps H2 cuts on the table for the next move.
Comfortable that "Higher for Longer" will be sufficient to curb inflation
Follows Vice Chair Jeffersons "new economy" vibes. A potential repeat of the 1990s, higher neutral rate but Fed can cut despite strong household demand.
BNYM highlight that recent meeting, "the press conference has typically been viewed as more dovish than the policy statement" and ING conclude that the past 3 meetings have all seen the USD softer afterwards.
Hawks?
As previously stated the biggest risk is the hawkish surprise is already in the price given the tone in the streets previews.
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,”... if this sentence is re-written, a more formal guidance that the next move is not a confirmed cut, the market will be forced to apply a higher probability that a hike is still possible if inflation remains stubborn.
Has the Fed run out of runway to cut in 2024?
Sticky Inflation: energy prices are back to 2023 peaks due to tensions in the middle east
Housing costs: in particular rentals were always going to have a lagged impact on CPI. Insurance premiums and other services are also rising faster than expected
Base effects headwinds: "Annual inflation is set to make little progress in the second half of the year, as the figures will be compared to a period in late 2023 when price pressures were rapidly easing."