Decoding Powell's Speech: More Than Just Lowering March Rate Cut Odds

During an early morning press conference, Federal Reserve Chair Powell dampened expectations of a rate cut in March. This announcement coincided with significant drops in all three major US stock indices, and the yield on the US 10-year Treasury dipped below 4%.

Powell asserted that it seems unlikely that the committee will cut rates at the March, but this remains to be confirmed. In essence, he emphasized that he wouldn't consider it the most probable scenario, or the baseline forecast. Derek Holt, chief economist at Scotiabank Capital Markets, remarked in a report to clients that this rate cut in March is highly unlikely.

Other key points from Powell's press conference:

Bill Adams, chief economist at PNC Bank, highlighted the Fed's erroneous belief that high inflation would be temporary in late 2021 and 2022. Therefore, they aim to avoid repeating this mistake. "The Fed will refrain from initiating rate cuts until they witness inflation sustainably returning to the 2% target," Adams explained, anticipating rate cuts to commence in June.

Powell refrained from disclosing the timeframe required for the Fed to gain confidence in easing monetary policy. Once the Fed initiates rate cuts, it may prove challenging to halt the process.

Greg Daco, chief economist at EY, interpreted Powell's remarks as suggesting that once the easing cycle commences, the Fed will cut rates at every meeting. He emphasized Powell's assertion that the first rate cut "marks a crucial decision, initiating the process of easing constraints that would be executed effectively.

Holt, Vice President of Scotiabank observed that, Powell hinted at potential changes to the ongoing balance sheet reduction plan QT starting in March. Holt speculated that the Fed "will consider various factors over the next year or so," possibly alluding to the timetable for ending QT. This observation could indicate a reluctance to abruptly terminate QT and a desire for a more urgent timetable.

Many economists anticipate QT to conclude later this year. The Fed seeks to gather more data on inflation. Omair Sharif, president of Inflation Insights, interpreted Powell's comments as reflecting Fed officials' concerns about the potential rebound of core commodity prices following consecutive months of decline. "Core commodities have significantly contributed to the slowdown in core PCE and core CPI," Sharif noted. "The Fed appears skeptical that this trend will persist." Additionally, Sharif highlighted the Fed's preference for future softening in rental data to bolster confidence in the housing market's ability to more effectively mitigate core inflation in the months ahead.