Macro D: Thoughts on the Fed

May 2, 2024

As I have mentioned in previous posts, I am inviting a good friend and fellow macro enthusiast, “Macro D”, to contribute with his timely thoughts and observations. His style of recording his thoughts and trying to find answers is different to mine, and I think it complements the overall offering tremendously. The feedback so far has been overwhelmingly positive. Thank you.

Below are his thoughts on yesterday’s FOMC meeting and the likely trajectory going forward. If you have any questions for him, just comment on this post, and I will make sure to forward any questions & comments to the D himself.

I will include my own FOMC thoughts in tomorrow’s Friday Paper Book.

Until then, Macro D, flip the decks.

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From last Sunday night, I was already quivering with curiosity.

Powell will return to centre stage on Wednesday.

What will he tell us?"

I asked myself this question, and in the meantime, I reasoned as follows: "If the data-dependency model were a law written on live flesh, then Jay should immediately raise his voice (at least by a tone) and policy rates too (these by at least a quarter of a point).”

Why?

In the USA, the word stagflation is no longer blasphemy because prices rise and growth is slowing down.

Then, I asked myself:

“But if Jay raised rates, what would happen?”

Maybe the police would arrive on Wall Street, and immediately afterwards, everyone would go together to register a new order.

A printing order, but for dollars.

All I had to do was stay calm and wait; after all, it was only Monday. Meanwhile, I reasoned: "Jay is one of the old school; he doesn't like to take the markets by surprise and even less does he like it to be the markets that surprise him”.

And I asked myself other questions.

“But how would Jay view inflation above 2% for life? Would he see it as a surprise? And how would he react?”

While waiting, all I had to do was go back and read the data.

You can look at it from all angles, but regardless of the winds of war and atmospheric ones, inflation is not under control. However you look at it, I thought so on Monday and even more so after Powell spoke.

Now, the chances of a rate cut before the November elections are very slim in my opinion.

MEETING

As far as interest rate policy is concerned, nothing has changed. The Federal Reserve left rates unchanged at a range between 5.25% and 5.5%, the highest level in more than 20 years. The non-move was well-telegraphed and expected.

Source: Bloomberg

The FOMC's frontman laid his cards on the table. The "absence of progress" in US inflation in the attempt to reach the FED's desired area, equal to 2%, is clear.

Source: Bloomberg

However, inflation continues to be a concern, with consumer prices rising to 3.5% year-on-year in March. With the decision to maintain the limit on rates, the FOMC, in its post-meeting statement, highlighted a "lack of further progress" in bringing inflation back to the 2% target. “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%,” reads the final statement reiterating the language used after the meetings of January and March.

On the other hand, Powell also ruled out (but not completely) the possibility that the Fed will raise rates again.

“I think it's unlikely that the next rate move will be a hike. I would say it's unlikely". These are his verbatim words.

Let’s now look at the consequences and what it means for markets going forward.