On today’s FOMC meeting
Today’s FOMC meeting was as I expected. On Monday, I wrote to my clients,
There isn’t enough in the data for Powell to lean back dovishly at the FOMC meeting on Wednesday. 49 basis points of cutting are priced-in through the end of the year and the Fed’s last SEP expects 50, nothing to correct for. Fed Governor Christopher Waller began to lean a little dovishly in the last word we heard from the Fed on 1/16, but since then, data improved in manufacturing and housing. I think the message will be “the economy is strong, we are slowly approaching our goals, and we don’t see a need to adjust policy now.” I can’t imagine Powell giving guidance on when the next cut will be.
And this was the message. The Fed is a function of what happens with the economic data, not their forecasts. Since the last meeting, economic data is just a little higher as shown in the Lantern Daily Economic Index and so there wasn’t a tone shift. I noticed several things in the press conference that help clarify hot topics of the moment.
1. On Donald Trump’s statement at the Davos World Economic Forum that he will demand lower rates from the Fed. Steve Liesman of CNBC specifically asked if he has had any contact with Donald Trump and Powell said, “I’ve had no contact.”
2. On what has changed since the last meeting and when they will lower rates again.
Nick Timiraos (WSJ): Chair Powell, you and several of your colleagues said around the time of the last meeting, that your policy stance was meaningfully restrictive. Given economic and financial market developments since then, how has your confidence changed in an assessment that says interest rates are meaningfully restrictive?
Jerome Powell: I don’t think that my assessment really has changed. A couple of things have happened. We’ve gotten more strong data, but we’ve also seen rates move up at the long-end which could represent a tightening of financial conditions. I think if we look back over the past year or so, we can see that policy is restrictive if you look at the effect of high rates on interest sensitive spending, for instance housing and if you look at the achievement of our goals, we are seeing the economy move towards 2% inflation and has moved, largely, to maximum employment. We literally look at the movement towards the goal variables to make that assessment. Now policy is meaningfully less restrictive than it was before we began to cut. It is 100 basis points less restrictive and for that reason, we are going to be focused on seeing real progress on inflation or, alternatively, some weakness in the labor market, before we consider making adjustments.”
3. On Trump administration policy uncertainty.
Colby Smith (NYT): …we’ve seen inflation expectations across a number of measures rise sharply which has, in part, been linked to tariff concerns. But there has also been this encouraging data that you mentioned in terms of CPI and rent indices. So, how would you characterize concerns about upside risks to inflation across the committee, especially those tied to policies related to the Trump administration?
Jerome Powell: Well, I’d say that you see expectations moving up a little bit at the short-end but not at the longer-end which is where it really matters and those could be related to what you mentioned, some of the new policies. I think where the committee is—very much in the mode of waiting to see what policies are enacted. We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy. We’re only just beginning to see, and actually not really beginning to see much. And, I think we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be. So, we’re going to be watching carefully as we always do. This is no different than any other set of policy changes at the beginning of an administration. We’ll patiently watch and understand and kind-of not be in a hurry to get to a place of understanding of what our policy response should be until we see how it plays out.
4. More on Trump administration policy uncertainty and using economic data to guide them.
Michael McKee (Bloomberg): You and your colleagues normally condition future policy moves with the phrase “if the economy develops as we anticipate.” Is it fair to say that since there is a lot unknown about what this administration’s fiscal policies are actually going to be, that you don’t have a medium to long-term economic forecast that you can have confidence in? Or, if that’s not true, can you lay what you think is going to happen in the economy, how you see it developing?
Jerome Powell: Well at all times, at all times, forecasts are conditional, at a minimum, on just a set of expectations, and they are highly uncertain in both directions, we know that. Economic forecasting is really difficult beyond just a month or two out. So, in the current situation, there is probably some elevated uncertainty because of significant policy shifts in those four areas that I mentioned: tariffs, immigration, fiscal policy, and regulatory policy. So, there is probably some additional uncertainty, but that should be passing, we should go through that and then we’ll be back to the regular amount of uncertainty. So, you know, what forecasters are doing, not just us, but everybody is doing, is they’ve got sort-of just a set of assumptions about what might happen but they’re really kind-of in the nature of a placeholder, meaning “plausible, “could-be”, but honestly, you wouldn’t stand behind it because you just don’t know. And so, you are just on hold waiting to see what comes down. You know, it is a very large economy and policies affect it at the margin. But, we’re going to wait and see.
Michael MacKee: If I could follow up, the idea that you feel policy is restrictive suggests that the Fed, in general, wants to continue to lower interest rates. So when you look at the data that you are dependent on, are you looking for data that tell you that you can cut, or data that will tell you you should hold?
Jerome Powell: You know, [laugh], we’re looking for…it’s more the other way. The way it works is, we are looking at the data to guide us in what we should do. That’s what we do. Right now, we feel like we are in a very good place. Policy is well positioned, the economy in quite a good place actually as well and what we do expect is to see further progress on inflation and as I mentioned… As we see that, or if we were to see weakening in the labor market, that could foster, we could then be in a position of making further adjustments, but right now, we don’t see that, and we see things as in a really good place for policy and for the economy and so we feel like we don’t need to be in a hurry to make any adjustments.
5. On Fed independence.
Elizabeth Schulze (ABC): To follow up on Steve’s question, what reassurance can you give the American public that the Fed will continue to operate independent of politics under this administration?
Jerome Powell: Well, you know, as I’ve said countless times over the years, this is who we are, this is what we do. We study the data, we analyze how it will affect the outlook and the balance of risks and we use our tools to try to, given our best understanding, our best thinking, try to achieve our goals. That’s what we do, that’s always what we do. Don’t look for us to do anything else. And that’s, you know, lots of research shows that’s the best way for a central bank to operate that will give us the best possible chance to achieve these goals for the benefit of the American people. That’s always what we are going to do and people should have confidence in that.
6. On AI and DeepSeek.
Courtney Brown (Axios): I wonder if the AI prompted sell-off in the stock market this week signaled anything to you about the state of financial conditions?
Jerome Powell: On AI, it’s a big event in the stock market and in particular parts of the stock market. I mean what really matters for us is macro developments and that means substantial changes in financial conditions that are persistent for a period of time. So, I wouldn’t put that label on these events, although of course, we’re all watching it with interest.
In summary, the Fed thinks they are restrictive and will lower rates, they are not being affected by imagined policies of the Trump administration, they are being affected by strong economic data. Economic policies affect the huge U.S. economy at the margin (small), and the Fed will keep doing what it always does, which is follow the data, not rhetoric from the Presidential administration.