Fed minutes show caution on rate cuts

Federal Reserve Chair Jerome Powell spoke at the ECB Forum on Central Banking in Portugal on Tuesday. He took a cautious stance on cutting interest rates. This is despite acknowledging a disinflationary trend in the economy.

Powell: "Inflation now shows signs of resuming its disinflationary trend."

"We are getting back on a disinflationary path."

"We've made a lot of progress."

September cut? "I'm not going to be landing on any specific dates here today."

— Nick Timiraos (@NickTimiraos) July 2, 2024

Powell said more substantial evidence is needed before making any changes to the current interest rate policy. NewEdge Wealth chief investment officer Cameron Dawson provided insights into Powell’s comments. Dawson noted that growth stocks have outperformed value stocks by 16% this year.

“#Fed Chair Powell said he was pleased with how #inflation had resumed a downtrend following a [Q1] rebound, indicating could begin lowering interest rates by the end of summer even though he declined to endorse such a move” via @NickTimiraos https://t.co/37GII27Koy

— Gregory Daco (@GregDaco) July 2, 2024

This is largely due to earnings revisions. Powell’s hesitation to cut rates is influenced by potential risks. These include immigration reform, tariffs, and supply chain issues.

On the #FederalReserve's dual mandate
Per his remarks just now in Portugal, Chair Powell …
Welcomes the resumption of a "disinflationary trend" but doesn't expect #inflation to get to 2% this year or next, or at least not until late next year, and
Is now watching the labor…

— Mohamed A. El-Erian (@elerianm) July 2, 2024

They could put upward pressure on inflation.

🇺🇸 *#FED'S JEROME POWELL SPEAKS ON PANEL AT ECB CONFERENCE IN SINTRA – BBG
*POWELL: WE CONTINUE TO HAVE SOLID GROWTH, STRONG LABOR MARKET
*POWELL: PRICES NOW SHOW SIGNS OF RESUMING DISINFLATION TREND
*POWELL: WANT TO BE CONFIDENT INFLATION IS MOVING DOWN TO 2%
*POWELL: WANT TO…

— Christophe Barraud🛢🐳 (@C_Barraud) July 2, 2024

However, Dawson believes significant rate cuts would likely depend on deterioration in the labor market rather than just inflation trends. The U.S. labor market remains steady with a 4.0% unemployment rate. This aligns with the Fed’s projections for the year. Friday’s upcoming job data is crucial. Any rise in unemployment could prompt the Fed to consider rate cuts, regardless of the inflation path. Economic forecasts have also shifted. The Atlanta Fed’s GDPNow model has been revised down to 1.7% from 2.2%. This reflects deeper economic surprises and suggests earlier forecasts were too optimistic. While this doesn’t necessarily signal an impending deep recession, it does suggest a moderation in growth expectations. The bond market is reacting to these dynamics as well. There has been speculation that Treasury yields are adjusting based on the potential outcomes of the upcoming presidential election. Increasing odds of a Trump victory raise questions about potential inflationary policies related to immigration and tariffs.

Fed remains cautious on cuts

These could influence future Fed decisions and market expectations. Dawson emphasized the importance of monitoring key economic indicators. Investors should stay attuned to potential catalysts that could shift market dynamics. For a sustained rotation to value stocks, there needs to be a catalyst. Dawson believes this would come from changes in earnings trends. Federal Reserve officials indicated at their June meeting that inflation is moving in the right direction but not quickly enough for them to lower interest rates. Minutes released Wednesday showed that policymakers lacked the confidence they needed to lower rates. They generally agreed there should be no rush to cut them. “Participants affirmed that additional favorable data were required to give them greater confidence that inflation was moving sustainably toward 2 percent,” the meeting summary stated. Though the minutes reflected some disagreement among the 19 central bankers who took part in the discussion, with some even indicating a preference for raising rates if necessary, the meeting concluded with Federal Open Market Committee (FOMC) voters holding rates in place. The Fed targets 2% annual inflation, a level it has been above since early in 2021. Officials at the meeting acknowledged recent improvements but wanted more evidence that it will continue. At the meeting, policymakers also provided an update on economic projections and monetary policy over the next several years. The FOMC “dot plot” showed one quarter percentage point cut by the end of 2024, down from the three indicated following the last update in March. Even though the dot plot indicated one cut this year, futures markets continue to price in two, starting in September. The committee largely left its economic projections intact, though they lowered their inflation expectations for this year. In discussions over how monetary policy should be approached, the minutes reflected some disagreements. Some members noted the need to tighten the reins should inflation persist, while others made the case that they should be ready to respond should the economy falter or the labor market weaken. The summary also noted a “vast majority” saw economic growth “gradually cooling” and that the current policy is “restrictive,” a key term as the officials contemplate how restrictive policy needs to be while bringing down inflation and not causing undue economic harm. Since the meeting, officials have largely stuck to a cautious script stressing data dependency rather than forecasts. However, there have been indications from multiple officials, including Chair Jerome Powell, that continued encouraging readings on inflation could provide confidence that rates can be lowered. In an appearance Tuesday in Portugal, Powell said the risks of cutting too soon and risking a resurgence in inflation against cutting too late and endangering economic growth have come more into balance. Previously, officials had stressed the importance of not backing off the inflation fight too soon.