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 17^th 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 12^th 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."

• Looser financial conditions: economic activity has been boosted by the Nov pivot and this has stalled the disinflationary trends. (Atlanta GDPNow currently forecasting 3.9% growth in Q2)

• ECI: 1.2% and above every single Bloomberg forecast (prior +0.9% QoQ and exp 1.0%). Government employees and unionized service workers have seen their wages soar at a record pace while non-unionized manufacturing workers are seeing wage growth slowing.

• POTUS Campaign: The Autumn Presidential Election distorts the calendar, reducing the available dates to ease. 

• The hawkish chorus from Committee members: Waller, Bostic, Mester, Kashkari et al have shown "no urgency", "no rush" or "restraint" to ease and have been more vocal in their public appearances to counter balance JPow's "patient" approach.

• Core inflation > 4%: does not call for rate cuts (Man Institute). Furthermore, DB (via The BondBeat) highlight "core CPI is still historically high, and apart from the post-Covid inflation, the last three months have seen the highest core inflation since the early 1990s"

but that doesn't mean a hike is coming... 

• Labour conditions are easing - supply of workers returning from early retirements as well as increased immigration is expanding the labour force. Slowing quits rate also indicates a cooling in labour conditions, easing wage pressures later this year.

• Balance sheet run off halved - The minutes from the March FOMC meeting suggest a desire to halve the pace of redemptions.

• Dudley in his opinion piece - "The Fed lost more than $100 billion last year and cumulative losses could reach $250 billion" ... can they pay a higher yield on debt?

• Seasonal pricing patterns could also explain why inflation surged at the beginning of the year, as it did last year

• Would rate hikes add to the already worried foreign investor?

Would a cut reduce inflation...? What if Erdogan was right?

For years western financial commentators laughed at Erdogan's pontification that interest rate hikes were fanning inflation in Turkey's economy. However, as the Fed pivots from the pivot, the same question is now being asked in some of the literature flowing through Harkster (your research inbox).... Are interest rates stimulating the US economy? Households simply have more money now than they did before covid.... 

• The Macro Trading Floor - What if Hikes are Stimulative?!

• Steno Research - Free Macro Nugget: Cut rates and inflation will go down

• Bloomberg - Booming US Economy Inspires Radical Theory on Wall Street

• NY Times - High Fed Rates Are Not Crushing Growth. Wealthier People Help Explain Why.

What's in the price?

CME FedWatch Tool - less than 25% chance that rates will be unchanged by yr end

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Top Sources

Discovered on Harkster.com

1. Man Institute - Views from the Floor: How Hawkish Will the Fed Go?

2. NBER - The Cost of Money is Part of the Cost of Living

3. Bloomberg - Powell Is Poised to Keep Fed on Higher-for-Longer Path

4. LiveSquawk - FOMC PREVIEW: OBSERVERS PREDICT SUMMER CUTS ARE OFF THE TABLE

5. SriKonomics - Powell Prepares For "Bananas" Moment

6. FT - Is the Fed’s next move a raise in rates?

7. Bloomberg - The Fed’s Quantitative Easing Program Cost Too Much

8. Calculated Risk Blog - FOMC Preview: No Change to Fed Funds Rate (calculatedriskblog.com)

9. Pepperstone - May 2024 FOMC Preview: Still Seeking Confidence

10. ING - Fed likely to hold rates steady and warn of the risk of delay to cuts

11. ING - US employment costs reacceleration incentivises the Fed to be more hawkish

12. NY Times - Inflation Is Stubborn. Is the Federal Budget Deficit Making It Worse?

13. Axios - The Fed's big question: Are high interest rates doing their job?

14. BNYM FOMC Preview - Hawkishness Expected

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