Chip Somodevilla
On the first day of Powell’s testimony, not much happened, and he failed to take control. There was very little that was new. This comes despite continued signs of inflation reaccelerating and robust economic data.
If the Fed is correct in its assessment that inflation will return to target, the unemployment rate will rise, and growth will slow, then Powell has no reason to shift his measure. But if the Fed is wrong, then the Fed could be at the point where it is making a critical mistake.
Economy Not Following Fed’s Plans
But using the markets as a tool and a guide to predict the path of economic growth and the models that are available to us, we can see that the markets’ concern for inflation is growing again, that US GDP data is not slowing, and that job creation and wage growth are still very strong.
This would argue, for the most part, against rate cuts coming in 2024. As Minnesota Fed Governor Neel Kashkari noted in a Wall Street Journal interview on March 6, if things stay good, why do anything at all? Maybe this is the new neutral.
It’s quite possible that where rates are now are the neutral rate, and at least when looking at Atlanta Fed GDPNow estimates as we enter the final month of the first quarter, nominal and real growth remain robust at 5.4% and 2.5%, respectively.
Bloomberg
Meanwhile, we have seen 1-year and 2-year breakeven inflation expectations rising in recent weeks and have pushed back to the levels seen in the spring of 2023, when overall inflation was still trending at higher levels. Also, 1-year and 2-year inflation swaps have risen, while not as much, a clear trend reversal.
Bloomberg
Financial Conditions Have Eased
One of the reasons why the economy has held up better, and inflation expectations appear to be rising again, is due to the easing of financial conditions that have largely been witnessed over the past year since the failure of Silicon Valley Bank. The easing of conditions has been relatively consistent over the past year, with easing seemingly picking up in November, but it has shown some tightening in recent weeks. It isn’t clear if this is a change in trend or a short-term bump. One would think, though, that if conditions continued to ease, recent economic activity may only strengthen further.
Bloomberg
Jobs Data Expected To Be Healthy
The job data due to come on March 8 is expected to show continued strength, with an expectation for 200,000 new jobs to have been created, down from 353,000 last month, while the unemployment rate is expected to remain unchanged at 3.7%. Wage growth also is expected to remain healthy and rise at 0.2% m/m, down from 0.6% last month, while rising by 4.3% year-over-year, down from 4.5% year-over-year. While these numbers are expected to be slightly weaker than January, these are still very healthy numbers and, when coupled with the other data points, seem to suggest that the Fed projections, at least to this point, may be too downbeat and that the slowing in economic growth the Fed is expecting to see may not come to fruition.
It’s good to see that the economy is still healthy and robust, which we all want. However, allowing financial conditions to ease too much risks the re-acceleration of inflation, which could threaten the Fed’s path for rate cuts in 2024.
The longer the Fed allows financial conditions to ease, the greater the risk of allowing inflation to pick back up again and derail the Fed’s projected policy path. To this point, the Fed has failed to push back against the easing of these financial conditions.
