Suddenly late at night! Big news, Fed!

$$$$$$ Powell’s latest statement releases a major signal

Late at night on March 29th, Beijing time, Federal Reserve Chairman Powell emphasized in his speech at the San Francisco Fed that the Federal Reserve was in no rush to cut interest rates and hoped to see more "better" inflation data to increase confidence, and would continue to carefully seize the opportunity to cut interest rates. The Fed can and will be cautious about cutting interest rates.

On the eve of Powell's speech, the Fed's favorite inflation indicator had just been released, sending a signal that inflation was cooling. On March 29, local time, the latest data released by the U.S. Department of Commerce showed that the core PCE price index, excluding food and energy, increased by 2.8% year-on-year in February, the lowest level since March 2021, which was the same as market expectations. The correction is 2.9%.

Some analysts pointed out that the PCE data may strengthen traders' bets on the Federal Reserve to cut interest rates. March 29, local time, is Good Friday, and the U.S. stock market is closed for one day.

Powell’s latest statement

Late at night on March 29th, Beijing time, Federal Reserve Chairman Powell attended an event at the Yellen Conference Center of the San Francisco Fed and conducted a nearly 40-minute interview with well-known journalist and financial program host Kay Risdahl, during which he discussed monetary policy, decision-making ideas, etc. A series of issues were discussed in depth and a major signal was released.

In the interview, Powell emphasized that the Fed is in no rush to cut interest rates and hopes to see more "better" inflation data to increase confidence, and will continue to carefully seize the opportunity to cut interest rates.

After the interview began, Powell said the latest core PCE inflation data released earlier on Friday was "broadly in line with our expectations." But Powell reiterated that lowering interest rates would not be appropriate until officials are confident that inflation is moving toward their 2% target.

"It's good to see some data in line with expectations," he said, adding that the latest data was not as good as the second half of last year, so more "better" inflation data was still needed and the Fed would not comment on the two months' data. "Overreact" and will err on the side of caution, it's important to get it right.

Powell said the Fed now faces an evenly matched attack between economists and investors eager to cut interest rates for the first time and those who are more cautious.He said: "We will be cautious about this decision because we have the ability to do so. We want to be more confident before taking the step of lowering interest rates."

Powell said that in terms of the Fed's two major policy missions of promoting employment and curbing inflation, if one is far from the target, it should focus on this one. He said that employment and inflation targets are facing risks at the same time. If the job market unexpectedly weakens, the Fed will respond in a timely manner.

Powell believes that the probability of a recession in the United States is not high, and there is no reason to believe that the US economy is on the verge of a recession. "We are in a strong economy and a good labor market. There is no reason to believe that the economy is in a recession or on the verge of a recession."

"The US economy is growing at such a steady pace, and the labor market is still very, very strong, which gives us more confidence that inflation will fall before we take the important step of lowering interest rates."

He said that the Fed's mission has not been completed, and the goal is still to achieve a 2% inflation rate. The Fed has the opportunity to quell inflation without hurting the economy, and the current interest rate level has not hurt the US economy. At the current time, it is impossible to cut interest rates out of the cycle. His personal expectation is that interest rates will not fall to very, very low levels before the epidemic.

In addition, regarding the issue of policy independence that the market is very concerned about, Powell responded that the independence of the Federal Reserve will not be affected in the context of the 2024 election, and emphasized the relationship between independence and confidence and the ability to fulfill dual missions.

Regarding the ongoing reduction of the Federal Reserve's balance sheet, Powell also said that the core of the reduction is to provide highly transparent and predictable information. Interest rates are the main story of monetary policy, not reduction.

Powell also emphasized that the Federal Reserve may start to slow down at some point in time, but the reduction has nothing to do with the Federal Reserve's concerns about the economy, it is just the Federal Reserve's plan.

Powell also revealed that he now works from home on weekends and talks to various people throughout the weekend.

Good data came

On March 29, local time, the latest data released by the U.S. Department of Commerce showed that the core PCE price index in February, excluding food and energy, grew by 2.8%, the lowest level since March 2021, in line with market expectations, and the previous value was revised to 2.9%.

Among them, the annual rate of 2.8% is the lowest level since April 2021, but it is still far from the Federal Reserve’s 2% inflation target.

On a month-on-month basis, core PCE growth fell back to 0.3% month-on-month in February, in line with expectations. In January, the index was revised up to 0.5% month-on-month, setting the largest "back-to-back" increase in a year. The core index is a better measure of underlying inflation than the headline index.

Driven by rising gasoline prices, the U.S. PCE (Personal Consumption Expenditures) price index rose to 2.5% in February from the previous value of 2.4%, the first rebound since September last year, in line with market expectations.

It is worth noting that on a six-month annual basis, the core PCE data accelerated to 2.9%, the fastest since July 2023, and once fell below the Fed's 2% target at the end of last year. The Fed hopes to see more benign inflation data in the coming months before cutting interest rates.

In addition, deflation of durable goods slowed down in February, while inflation of non-durable goods accelerated. So-called super core services excluding housing inflation remained at around 3.33% year-on-year, but core services inflation fell sharply month-on-month, with health care and financial services registering much smaller increases than last month.

Some analysts pointed out that the PCE data may strengthen traders' bets on the Federal Reserve to cut interest rates. Traders are now expecting a lower rate cut than the 75 basis points the Fed forecast in 2024 in its March dot plot. When markets reopen next week, the latest PCE data could push market bets closer to the Fed's expectations.

After the release of U.S. PCE data, the market expected that the probability of the Fed staying on hold in May remained unchanged at 95.8%.