Firstly, as markets had expected, the dovish pivot that begun in December – with the inclusion of the word “any” to frame potential further policy tightening – continued, as the Committee shifted guidance to describe future “adjustments” to the target range for the fed funds rate. Clever – signalling to markets that the next move is likely to be a cut, but not going all the way to say so explicitly, while also leaving the door open to a renewed tightening in policy, or at least a more hawkish bent to Fedspeak and delayed easing, were upside inflation risks to emerge.
Then, at the press conference, eventually, Powell conceded that a March cut was “not the base case”, even as markets had assigned a greater-than-even chance of the Fed firing the starting gun on the easing cycle at that meeting. Again, clever – pushing back on market rate expectations, to keep financial conditions tight(ish) and bear down on inflation, but providing optionality to cut at that meeting if the economy were to evolve in a poorer way than currently foreseen.
On which note, Powell did outline some conditions under which cuts may come sooner than the base case expects – ‘unexpected labour market weakening’ is one, placing greater emphasis than usual on the 2 jobs reports between now and the March FOMC, while financial stability concerns will likely be another. Once more, intelligent policy – giving markets a hint of what the Committee will be paying most attention to in the realm of downside economic risks.
Clearly, policy optionality remains the ‘name of the game’ for the FOMC, as was also shown by Powell’s remarks on inflation, in refusing to be drawn on either a level that inflation must reach, or how many more months of disinflationary data the Committee want to see, before cutting rates. Again, clever policy, whereby policymakers – assuming the now-embedded disinflationary trend continues – can, reasonably, at any stage, point to now having enough data to confirm that inflation is sustainably on its way “towards” 2%.
That “towards” is important, implying that policymakers are not seeking a particular price measure to dip under the 2% handle. Instead, just needing to be sure that inflation is on its way there, and will stay there, even if policy is made less restrictive via rate cuts.
This all leads to a number of conclusions: