FOMC: There Can Be Only One
The FOMC cuts the head off the bull and frames median expectations for 1 cut on the weight of the “no cuts + 1 cut” tally.
The Fed started out with a modest market buzz kill on the earlier CPI celebration with a dot plot showing 1 cut at the median for 2024 with 4 members at no cuts, 7 at 1 cut, and the remaining 8 of “the gathering” at 2 cuts.
Looking back to the start of the year, that output today is still a relatively tight grouping of expectations after the mixed menu of econ data items served up in recent weeks from banner jobs on Friday to favorable CPI metrics today.
The hope is that FOMC nuance is not just studying the yellow lines when a geopolitical truck might be coming at you from one direction (trade wars) and domestic political volatility from the other (post-election upheavals, mass deportations, and legislative and budget instability).
The equity markets saw the NASDAQ and S&P 500 climb to new highs still as we go to print while the UST rally from earlier in the day started getting pared back but still lower on the day.
Reading the dot plots and forecasts and catching the Powell Show is always a good mental exercise. The takeaway from the cable chatter was that this was a surprise and somewhat Hawkish. The Powell presentation was not a barnburner. He did restate that the morning CPI data was factored into the consensus numbers.
The dot plot consensus was very tight in the mix but rolled up into a median of 1 cut with 4 staying at current and 7 at 1 cut but a group of 8 calling for 2 cuts. For that group of 8, they left themselves room to maneuver and react to any drift in data higher or lower in inflation pressure without being lampooned at the faculty picnic.
A quick read on the forecast medians looks like the following:
GDP growth: The median GDP forecast for 2024 was for 2.1%, unchanged from March. As we cover in our regular GDP growth updates, it takes very little to move the needle on such low GDP numbers across items such as private inventory and changes in trade deficits (see 1Q24 GDP: Second Estimate, Moving Parts 5-30-24, 3Q22 GDP: It’s the Big Little Things 10-27-22). The 2% GDP growth can become 3% or 1% pretty easily. The PCE line in GDP is arguably the main event from here into the next round of 1Q24 revisions and the 2Q24 peak selling period for many industries.
Employment: The median forecast for unemployment is for +4.0%, unchanged from the March forecast. Powell mentioned JOLTs and job openings coming down. We would highlight that even after the decline, the job openings number is also higher than any point in the pre-COVID cycle (see JOLTS April 2024: Shorter Line but Not Short 6-4-24). We looked in detail at jobs and occupational deltas this past Friday (see Payroll May 2024: The Wave Continues 6-7-24).
PCE inflation: The median forecast was notched higher to +2.8% from the March projection of +2.6%. Powell was gently pressed on that in Q&A and the response was somewhat light and underwhelming. Part of it was a muddled response on unfavorable comps vs. where the market was last year. Maybe we whiffed on his point, but that median forecast implies the market will not see any progress since the Core PCE is there now at +2.8% (see PCE, Income and Outlays: Lower Income and Consumption, Sideways Inflation 5-31-24). If that is the case, does that imply no more cuts? The forecasts show a lot of progress in 2025 to a Core PCE of +2.3% and then the +2.0% target in 2026. That means the median forecast for PCE inflation was bumped higher from March to +2.8% from +2.6% and 2025 was bumped higher from +2.2% to +2.3%. That implies less optimism at the median level in the gathering of 19.
As Powell wound down his comments, there was not a lot new to grasp onto for parameters from what we could gather. While the market didn’t like it coming off the morning rally, the reaction was waffling around as the call proceeded. As we hit print, the Dow is in the red and the S&P 500 and NASDAQ are still strong today.
See also:
Trade Flows: More Clarity Needed to Handicap Major Trade Risks 6-12-24
Footnotes & Flashbacks: State of Yields 6-9-24
Payroll May 2024: The Wave Continues 6-7-24
JOLTS April 2024: Shorter Line but Not Short 6-4-24
Construction Spending: Stalling Sequentially at High Run Rates 6-4-24
PCE, Income and Outlays: Lower Income and Consumption, Sideways Inflation 5-31-24
1Q24 GDP: Second Estimate, Moving Parts 5-30-24
Retail Sales April 2024: Get by with a Little Help 5-15-24
Consumer Sentiment: Flesh Wound? 5-10-24