FRB-US got it right, once again. Pi* will dictate the cuts. The June 2024 FOMC can be summarized as follows: the participants reaction function continues to be very close to FRB-US. We expected the dots to show 1 cut in 2024 but in the September SEP, not at this meeting. Instead, the FOMC followed the model more closely. Unsurprisingly, the new dots show an upward revision to core PCE in 2024 and 2025, as well as to the longer-run FF rate. Overall, the implicit message remains the same: it’s about pi*, not published inflation. How many more good CPI reports do we need for the Fed to cut? Almost impossible to say, as usual. However, very likely more than 1 or 2.
On our end, what we can do is to keep estimating pi* for you (scenarios for Q3 coming next week, promised!), run FRB-US, and promptly inform you if anything changes.
Statement
No changes. No relevant changes in the statement, at least to our eyes.
The dots
FRB-US wins everything. Once again, FRB-US helps anticipating the dots (see here for a similar episode). The new SEP shows only 1 cut in 2024, in line with the model. The SEP also shows a higher path of the FF rate throughout the medium-term as in FRB-US (reminder: we run the model assuming R* at 0.8% in anticipation of what happened). Having said that, the new SEP is a bit more hawkish than we expected, not because we do not trust FRB-US (we do, and we will even more going forward!) but because we expected this outcome at the September FOMC (and 2 cuts in 2024 at this meeting). In any case, the message is clear: as we tried to stress, the Fed is not even thinking about cutting rates. And another soft CPI print (or 2 or even 3) will probably not be enough, until pi* will be close to 2%. For this reason, we continue to be skeptical the Fed will cut rates in September, they are not bluffing.
Comparison between the March SEP (blue solid line) and pre-FOMC FRB-US model run (red dashed line).
Q&As
Question: 2 or 3 more good CPI prints and September cut is possible?
Powell. “We don’t make decisions about future meetings until we get there. I think in terms of what we need to see, I mentioned it earlier. We want to gain further confidence. Certainly, more good inflation readings will help with that. I’m not going to be specific about how many because, you know, really, it’s going to be not just the inflation readings. It’s going to be the totality of the data. […] And you ask: are we confident that we reached an appropriate level of confidence that inflation is moving sustainably to 2%? Or alternatively, do we see really unexpected signs of weakness in the labor market that would call for a response which is another thing that could happen? But again, we don’t see that. And we do see today’s report as progress and as you know, building confidence but we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time.”.
Comment: As we always say, there is no way of answering that question. The reason is always the same: it depends of pi*, the estimate of which is not straightforward and depends on published inflation but only to some extent (that is, it depends also on expectations, wages, etc..). This is why at every press conference Powell mentions “the totality of the incoming data”, meaning the general equilibrium of the story. But again: do we need 1 more good CPI report? Do we need 2? What we can say is this: it’s very hard that 1 (or 2) good reports can make a difference (remember H2 last year). We will keep estimating pi* for you, ça va sans dire.
Question: Core PCE could be 2.6% in May and you project it at 2.8% in December. Wouldn’t it be weird to cut rates with the YoY going up in H2?
Powell. “What we said is we don’t take it will be appropriate to reduce rates and begin to loosen policy until we have more confidence that inflation is moving back down to 2% on a sustainable basis. […] I mean, really, it’s a forecast a fairly conservative forecast month by month, that would lead to slightly higher 12 months rates by the end of the year. If we get you know, good, better readings than that, then you will see that [the 2024 core PCE dot, ndr] come down or remain the same.”.
Comment: Again, it is not about published inflation, that’s why it can be confusing most of the times. But the question in this case is correct in our view: the Fed is not the ECB and the first cut is more likely to come at a SEP meeting in which the FOMC (and the staff) will revise down the core PCE forecast.
Question: higher R*?