On The Horizon For Fed: Scaling Back 'Quantitative Tightening'

While the main focus for Fed-watchers is whether the central bank will cut its benchmark interest rate in March, the central bank will also have to decide when to stop its campaign of ‘quantitative tightening’ which has gone hand-in-hand with interest rate hikes.

The central bank has sold trillions worth of financial assets since it shifted from economic stimulus mode to inflation-fighting mode in March 2022, essentially removing the money from financial markets. While the FOMC’s official statement didn’t give any indication of when that campaign might cease, Fed chair Jerome Powell said it would be a topic of discussion.

“That's not a decision that we've made,” he said. “That's what we'll be talking about at the March meeting.”

The Fed’s goals in balancing quantitative tightening versus its opposite, quantitative easing, is less about fighting inflation and more about keeping the Fed funds rate at the desired level. If bank reserves get too low because of quantitative tightening—what econ🎀omists call “reserve scarcity”—interest rates can shoot ꧒up beyond what the central bank is targeting, William Dudley, former president of the Federal Reserve Bank of New York, said on Bloomberg Wednesday. 

“It's about basically getting the level of reserves in the banking system down to a level that's as low as possible without the reserve level actually affecting interest rates,” he said. “This is based on the banks’ demand for reserves and the Feds’ trying to estimate what the demand is they want to meet, to make sure that there are enough reserves in the banking system, but not too much.”

Economists Think the Fed Has Runway for Caution

The Federal Reserve on Wednesday made it clear they weren't sold on the sustainability of inflation's slowdown.

As they have in previous meetings, the Fed said they were watching data to determine when it was appropriate to cut rates. Although inflation has slowed in recent months, Chair Jerome Powell said the Fed needs to be confident that inflation won't stick before they make cuts.

"The Fed was badly burned in late 2021 and 2022 when they thought high inflation would be transitory, then got caught by surprise when it was higher and more persistent than expected. They want to avoid making the same mistake twice," wrote Bill Adams, Chief Economist for Comerica Bank in a commentary. "The Fed will wait to pull the trigger on rate cuts until they see the whites of 2% inflation’s eyes."

This caution on the Fed's part caused many analysts, economists and investors to forecast the first cut would come closer to mid-year.

"It doesn’t appear the Fed is buying into the idea of insurance cuts to increase the odds of engineering a soft landing," wrote Ryan Sweet, wrote Chief U.S. Economist at Oxford Economics. "That said, if the Fed finds itself falling behind the curve, it has plenty of room to cut aggressively and this could be factoring into their communication."

Dow, Nasdaq and S&P 500 Fall On Powell's Cautioned Approach

Stocks took one final, definitive nosedive Wednesday afternoon as Fed chair Jerome Powell spoke on the outlook for interest rates this year.

The Dow—up at the beginning of Powell’s comments—nosedived as he warned a rate cut at the Fed’s next meeting in March was not the base case. He also said that he would not agree with the assessment that t✨he U.S. economy had achieved a soft landing.

The Nasdaq, also briefly boosted by Powell’s comments, tumbled to a fresh intraday low as Powell’s caution took the wind out of the sails of battered tech stocks. The index was down 2% with about half an hour left in the session.

The S&P 500 tumbled a full🙈 percentage point in about 20 minutes while Pඣowell spoke.

-Colin Laidley

Fed Fund Futures Whipsawed by Fed-Speak

Just before the Fed released its official statement, markets were pricing in a 56% chance that the Fed would cut its key rate at the FOMC's next meeting in March, according to the CME Group's FedWatch tool, which forecasts interest rate movements based on fed fund futures trading data.

Within minutes of the release of the statement—with its reference to a need for more proof thatꦑ inflation was trending lower before rates would be lowered—the probability of a March rate cut dropped to 47%.

When Chairman🐷 Jerome Powell seemed to take a more dovish stance in the early part of his post-meeting press conference, the likelihood of a policy easing in March shot up to 59%, only to drop to around 37% after Powell said that a rate cut at the next Fed meeting is unlikely.

-Stephen Wisnefski

Fed Chair Powell Not Ready To Declare Economy Has Landed Softly

Keep your seatbelts on and your tray tables in the upright position: It’s too soon to declare that the economy has reached a “澳洲幸运5官方开奖结果体彩网:soft landing,” Fed chair Jerome Powell said at a press conference Wednesday afternoon.

Many expected an 澳洲幸运5官方开奖结果体彩网:economic crash and recession in 2022 when the Fed began its campaign of interest rate hikes to restrain inflation. A soft landing was a long shot by historical standards since usually there’s a recession when the Fed raises interest rates to combat inflation.

While inflation has 澳洲幸运5官方开奖结果体彩网:come down significantly since 2022, Powell said he wouldn’t declare victory until it stabilized at the Fed’s goal of 2%.

“I wouldn't say we've a𒉰chieveꦬd that and I think we have a ways to go,” Powell said. “We're encouraged by the progress but we're not declaring victory.”

Markets React To Powell's Comments

Treasury yields, which jumped on the Federal Reserve's interest rate decision and statement earlier this afternoon, retraced as Fed chair Jerome Powell fielded questions at a press conference.

Powell emphasized that while o♍fficials are still w𝕴eighing the right time to cut, inflation is on a path to the Fed’s 2% goal.

In tur🙈n, 10-year yields dipped back down to 3.96%, where they were bef♊ore the Fed’s interest rate decision. The 30-year bond yield slipped to 4.2%.

Stocks also recovered from a post-Fe♛d drop, with the Dow climbing back into positive teꦬrritory and the Nasdaq surging to an intraday high above 15,400.

In the past markets 澳洲幸运5官方开奖结果体彩网:have listened and moved when Powell speaks—reacting even more than they have to past Fed chairs.

-Colin Laidley

Jerome Powell Is Looking for the Economy to Be Just Right

Federal Reserve Chair Jerome Powell continued to hammer home that the committee is no♓t completely convinced that the economy is where it needs to be to cut rates.

"We don't know with great confidence where the neutral rate of interest is at any given time, but that also doesn't mean that we wait around to see the economy turned down because that will be too late," he said at his press conference after the decision. "So we're really in a risk management mode of managing the risk that we move too soon or we move too late."

Chair Powell: Rate Cuts Are Coming This Year

Today's Federal Reserve announcement appeared to throw some cold water on market expectations of a Fed rate cut as early as March, but Chair Jerome Powell said cuts are on the way.

"We believe that our policy rate is likely at its peak for this tightening cycle and that if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint, at some point this year," Powell said in his press conference after the statement was released.

After the announcement, markets were pricing in a 47% chance of a rate cut in March, according to the CME Group’s FedWatch tool, down from more than 50% earlier in the day.

Former Atlanta Fed Chief Says FOMC Trying to Reduce Expectations of a March Move

While the dec🌊ision to keep the rate flat was no surprise, the official statement e♔xplaining the decision gave Fed watchers a lot to chew over.

Of particular interest was the fact that the policymaking committ𝔉ee said it “does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”

Former Atlanta Fed Present Dennis Lockhart, speaking on CNBC after the statement was released, said: "I think the (FOMC), by putting that sentence into the statement, was trying to reduce the frenzy of anticipation around a March move. It'll be interesting to see how Chairman Powell actually elaborates or interprets that in the press conference. They didn't have to put that in, and that clearly shows they are trying to calm things down so that they don't have so much discussion of a March move."

-Stephen Wisnefski

Markets Fall Slightly After Fed's Decision

Stocks, already in the red Wednesday afternoon, fell further as Treasury yields ticked up after the Federal Reserve left interest ra♊tes unchanged.

The Dow, the only major index in the green before the Fed’s 2 p.m. ET an🍸nouncement, slipped to trade 0.1% lower. The Nasdaq Composite and the S&P 500 fell further into negative territory, trading 1.5% and 1% lower, respectively.

The yield on the benchmark 10-year Treasury jumped 3 basis points to about 3.99% around 2 p.m. though yields remain low where they started the▨ day.

Read more about how the market is performing in the wake of the decision here.

-Colin Laidley

A Statement Change is Worth A Thousand Words

The statement from the 澳洲幸运5官方开奖结果体彩网:Federal Open Markets Committee saw some big changes Wednesday.

While it removed explicit mentions of interest rate raises,❀ it left the door open in case inflation reaccelerate💖s.

"The Committee judges that the risks to achieving its employment and inflation goals are moving into better balance," the statement said. "The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks."

The statement released today gave that small clue as to how the Federal Reserve's Open Markets Committee is thinking, and investors are looking to Chair Jerome Powell's press conference that starts shortly for more information. 

These statements are 澳洲幸运ꦉ5官方开奖结果体彩网:painstakingly crafted by the committee during each m🦂eeting, often adding or removing ꦜjust a matter of words.

Federal Reserve Predictably Holds Rates Steady

As widely expected, the Federal Reserve held its key 澳洲幸运5官方开奖结果体彩网:fed funds rate steady at a 22-year high of a 5.25%-5.50% range Wednesday.

The decision to keep the rate steady for now keeps interest rates on mortgages, credit cards, auto loans, and other credit at their highest in decades. 澳洲幸运5官方开奖结果体彩网:Household budgets and the 澳洲幸运5官方开奖结果体彩网:broader economy are feeling the pinch from those hi🏅gh rates, which are intended to quell inflation by discouraging borrowing and spending.

Read more about Wednesday's decision here.

Unions Brought Big Pay Raises In 2023 Despite Low Membership

Pay raises are either staying flat or heat🔴🦋ing up, depending on whether or not you’re in a union.

After adjusting for inflation, wages and salaries rose 2% over the year for private-sector union workers, more than double the 0.8% raise given to their nonunionized counterparts as of the fourth quarter, according to the employment cost index published by the Bureau of Labor Statistics Wednesday.

The big pay increases reflect major contracts negotiated by 澳洲幸运5官方开奖结果体彩网:Teamsters at UPS, the 澳洲幸运5官方开奖结果体彩网:United Autoworkers in Detroit, and other highly publicized union actions.

The outsized pay increases highlighted a paradox in organized labor trends—union membership 澳洲幸运5官方开奖结果体彩网:hit an all-time low last year despite several high-profile victories. Only 6% of🌞 the private sector wo🐲rkforce belonged to a union in 2023, according to the bureau.

Chicago Business Barometer Down Again in January

The Chicago Business Barometer declined further into contraction territory in January to 46.0.

Also known as the Chicago Purchasing Managers’ Index (PMI), the barometer assesses the manufacturing sector in the Chicago region. If the PMI is 50 or above, the manufacturing sector is growing; anything below 50 signals a contraction. The Chicago measure is often seen as a strong indicator of the nation's manufacturing strength.

The January figure is lower than the measure ౠof 48 that economists anticipa🎃ted.

A contracting manufacturing industry can have larger impacts on supply chain༒s, which can ultimately affect economic growth. In the short term, the January data reveals increased order backlogs, decreased inventories and production indexes at their lowest since O🍌ctober 2023.

-Avery Koop

Fed Rotation Could Make FOMC More Cautious

A new year means the Federal Open Markets Commi🃏ttee has💝 a new rotation of voters.

Of the 11 presidents of the nation’s regional federal banks, only five bank presidents vote each year. The New York Federal Reserve Bank president always gets to vote, while the other four spots are filled on a yearly rotation. Nonvoters still participate in the meetings and can influence the 🏅outcome bꦓy talking.

Wednesday's meeting will be the first time a new rotation of voters influences the outcome. The incoming voting members are Atlanta's Raphael Bostic, Cleveland's Loretta Mester, Richmond's Tom Barkin and San Francisco's Mary Daley.

Economists think the new crop of voters may be less inclined to cut ♓rates early.

"They are more cautious about the timing of policy rate cuts," wrote Bank of America's Michael Gapen. "That said, we don't put too much emphasis on the views of voters versus non-voters given the trend toward fewer dissents and preference for unanimous decisions."

The last time a voter dissented 澳洲幸运5官方开奖结果体彩网:was in June 2022.

Employee Compensation Costs Reflect Cooling Job Market

Compensation costs for employees🗹 were still growing in the fourth quarter, albeit at a slower rate than economists expected.

According to Wednesday's Employment Cost Index (ECI) report, compensation costs increased 0.9% in the fourth quarter. That's less than the 1% economists expected and 1.1% in the third quarter. It's also the slowest pace of growth since mid-2021.

"The moderation in compensation growth is consistent with the slowdown in job growth and easing in inflationary pressures that will allow the Fed to reduce interest rates later this year," wrote Jay Hawkins, Senior Economist with BMO Capital Markets.

The U.S. Bureau of Labor Statistics, which compiles the index, reported wages increased 0.9% and benefit costs increased 0🧜.7% from the prior quarter.

Over the year, total costs increased 4.2%, wages i🅷ncreased 4.3% and benefit costs increased 3.8%. Those levels a🦂re all lower than they were in the prior year.

Private-Sector Employers Added Fewer Positions Than Expected in January

Private-sector employers added fewer jobs than expected in January, with Wednesday's ADP employment report showing 107,000 new jobs were created in the month. That's lower than the 150,000 jobs economists were looking to see and the 158,000 jobs created in December.

The 澳洲幸运5官方开奖结果体彩网:employment report from Automatic Data Processing Inc. (ADP) tracks private-sector employment through the comp꧒any’s payroll databases, covering about one-fifth of private employers. The ADP report often serves as a barometer for the U.S. jobs report, which will be released on Friday and is expected to show a🅘 slight uptick in unemployment to 3.8%. 

“Progress on inflation has brightened the economic picture despite a slowdown in hiring and pay,” said Nela Richardson, ADP chief economist. “Wages adjusted for inflation have improved over the past six months, and the economy looks like it's headed toward a soft landing in the U.S. and globally.”

The report comes as a strong labor market has continued to produce more jobs than expected, 澳洲幸运5官方开奖结果体彩网:including last month. Continued strong hiring has raised worries that wages would remain high, in turn 澳洲幸运5官方开奖结果体彩网:keeping inflation elevated.

The 澳洲幸运5官方开奖结果体彩网:Federal Reserve isn’🉐t expected to cut rates during its announcement later today, but slower job growth could prompt officials to cut interest rates at upcoming m༒eetings. 

The ADP report showed that gains in pay continued to shrink in January, as employees who stayed in their job ov𝕴er the year saw wages iꦍncrease by 5.2%, down from December, while the 7.2% pay bump that job changers got was the smallest gain since May 2021.

-Terry Lane

Mortgage Applications Fall As Rates Remain Unchanged, Housing Prices Remain High

Low housing supply kept prices elevated, serving t♚o further discourage mortgage applications despite interest rates holding sཧteady.

Mortgage applications for the week ending Jan. 26 were 7.2% lower than the previous week, as the average 30-year 澳洲幸运5官方开奖结果体彩网:mortgage rate of 6.78% was little changed from the week prior, according to the 澳洲幸运5官方开奖结果体彩网:Mortgage Brokers Association. The average loan🗹 value came in at $444,100, the highest loan average since May 2022.

“Low existing housing supply is limiting options for prospective buyers and is keeping home-price growth elevated, resulting🤡 in a one-two punch that continues to constrain home purchase activity,” said Joel Kan, MBA vice president and deputy chief economist.

Housing supply has been limited as mortgage rates moved higher, creating a 澳洲幸运5官方开奖结果体彩网:“lock-in” effect that has promptꦜed homeowners to hold onto their lower in🐬terest rates.

While mortgage aꦐpplications declined, refinancing activity was 2% higher this week over last and was 3% higher than the same period a year ago.

-Terry Lane