June 13, 2024 09:15With the Fed on hold as expected, markets’ attention was on signals from the updated FOMC projections and Chair Powell’s presser.
On macro projections, no change was seen in this year’s GDP and unemployment, with a mild uptick in 2024 inflation.
■ The policy directive is moving exactly the way we expected in early 2024.
Expectedly, market expectations of the start of a cut cycle have been a moving goalpost.
■ No Fed cuts in 2024, followed by a shallow cut cycle, are on their way to turn into a reality, as they struggle to get to the last mile of disinflation.
June 13, 2024 09:15
With the Fed on hold as expected, markets’ attention was on signals from the updated FOMC projections and Chair Powell’s presser. The updated dots were a bit more hawkish than expected, with the median showing only one cut this year (down from three in March). That said, a plurality of participants still expect two cuts. The median dot did not surprise hawkishly for the out years – four cuts in 2025 and 2026 (vs three each in March). This implies a total of nine cuts in the cycle, same as the March dots, with a later start and a faster catch up. The June policy statement has also cut out the May statement’s discussion of changes in QT – the balance sheet reduction plan. On macro projections, no change was seen in this year’s GDP and unemployment, with a mild uptick in 2024 inflation.
■ Powell acknowledged that yesterday’s US CPI data represented a welcome improvement, but stressed that it is just one report and that the committee will need to see more “good data” to gain confidence that inflation is sustainably returning to target (particularly in light of the hot Q1 readings). He described the labor market as having returned to its pre-pandemic state, but emphasized that the FOMC will be closely watching for signs of unexpected weakening (to prompt cuts).
■ Overall, Powell wasn’t as overtly dovish as he has been in recent meetings and didn’t push against the dot plot. He was careful not to show his hand, likely seeking to keep a range of easing options on the table without fueling market expectations for September. Post FOMC, the markets partially retraced some of the sizable downmoves seen post CPI data in UST yields and DXY Index (-0.5%).
■ The policy directive is moving exactly the way we expected in early 2024. We had argued if it is time to reassess our faith in central banks’ guidance post-pandemic and called for no rate cuts by the Fed early this year (and consequently the RBI). See Is it time to fight the Fed? Expectedly, market expectations of the start of a cut cycle have been a moving goalpost.
■ No Fed cuts in 2024, followed by a shallow cut cycle, are on their way to turn into a reality, as they struggle to get to the last mile of disinflation. This is already spilling over to EM CBs, including the RBI. But unless this is accompanied by immediate negative growth shocks, we don’t see a collapse in EM risk assets, and believe that the cherry-picking theme will work relatively well for India assets.
