Federal Reserve Chairman Jerome Powell gave yet another speech and contributed to more confusion on the outlook for interest rates. Speaking at Stanford University on Wednesday, he seemed sanguine about inflation. "On inflation, it is too soon to say whether the recent readings represent more than just a bump," he said, reiterating his view that "the policy rate is likely at its peak for this tightening circle." Powell's views were countered over the two subsequent days by several of his Fed colleagues.
Neel Kashkari, President of the Minneapolis Fed, told "Pension & Investments" on Thursday that after suggesting two rate cuts this year at the last Federal Open Market Committee meeting on March 19 - 20, he may start thinking about whether any cut at all was needed unless there is an improvement in inflation. On the same day, Richmond Fed President Tom Barkin advised that "it is smart for the Fed to take our time." Neither of them was prepared to go with the Chairman's view and suggest that rates were at their peak, or that any rate cut will be implemented this year.
Powell faced more opposition to his cheery outlook yesterday. Lorie Logan, Dallas Fed President, expressed her concern that progress in inflation mitigation may not continue. "I believe it's much too soon to think about cutting interest rates," she opined. One upping all her colleagues, Fed Governor Michelle Bowman, a permanent voting member on the FOMC, told a New York audience yesterday, "I continue to see the risk that at a future meeting we may need to increase the policy rate further should progress on inflation stall or even reverse" [italics mine].
Where does all this leave the Fed? Senior officials confused but not reluctant to express contradictory views in public and unsettle investors! Neither economic theory nor history provides justification for the Powell position that the pick up in inflation during the opening months of 2024 may be just "bumps." This is the same Chairman who defended his massive easing of policy in 2020 - 2021 by expressing his belief that the acceleration in inflation would not last. I provided reasons as long ago as January 2021 why inflation was turning the tide and moving upward.
Once Powell committed that serious error, it has become a Herculean task to achieve a soft landing without pain and also bring inflation down to target at the same time.
The problem for investors was compounded by an inarguably strong jobs report released yesterday by the US Bureau of Labor Statistics. The 303,000 jobs created in March were more than the 270,000 positions created in February, and were well above the consensus expectation of 200,000. Although the 4.14% increase in average hourly earnings in March compared with a year earlier was smaller than the 4.28% rise posted in February, the figures remain too high to bring inflation down to the Fed's 2% target. The strength of the labor market was also evidenced by the 62.7% labor force participation rate, more than in February, as well as being the highest level since November 2023.
Markets have been whipsawed by the conflicting messages from Fed officials. While yields on two- and 10-year Treasurys fell immediately after the Powell speech on Wednesday, they ended the week higher, prompted by the jobs report and the more cautious stance that his colleagues took with respect to policy easing. I have expressed doubt about a June rate cut in the past, and policy easing has become even less likely in light of the healthy labor market. Equities had a losing week despite the rise yesterday after release of the BLS report.
Tighter monetary conditions will also put more bank assets underwater. These were institutions that bought long-dated Treasurys and mortgage-backed securities at far lower yields based on Powell's estimation that the pickup in inflation in 2021 was "transitory." Expect pain in the real estate space as well. Recent developments do little to increase demand for space while reduced interest rates that borrowers had anticipated are likely to be delayed.
Bottom line: The uncertain economic outlook over the coming months puts a premium on astute policy management as well as on clear communication from policy makers on where they are headed. Based on the past week's developments, it is doubtful that investors will have their wish met on either front.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California