Fed hawks and doves are now synchronizing for wait & watch

·       Fed front loaded 50 bps panic cut in Sep’24 in anticipation of Trump 2.0 and policy uncertainty; thus Fed may now wait and watch for at least H1CY2

·       The market is now controlled by Trump’s comments rather than Fed’s

On early Friday, March 21, 2025, Wall Street Futures crumbled on Trump’s ‘Liberation Day’ comments and a report that Trump is unmoved to craft a tariff deal. But later Wall Street Futures also recovered as Trump said there would be ‘some flexibility’ on tariffs implementation as Trump gave a one-month extension for US auto tariffs upon the request of US automakers to prepare for tariffs and potential disruption in existing supply chains. Eventually Wall Street edged up Friday. Wall Street Futures were quite volatile early Friday amid a "quadruple witching" event, during which stock options, index futures, index options, and single-stock futures all expire. FedEx and Nike tumbled on subdued guidance, while Boeing surged on US Airforce order of next-generation fighter jet. Wall Street was also dragged by guidance warnings from economic bellwethers across multiple industries.

On Friday, March 21, 2025, NY Fed’s President Williams said:

·       I closely watch fiscal policy as it relates to the economy and monetary policy.

·       The Central Bank's current forecasted rate path looks reasonable

·       Downside economic risks and upside inflation risks are both very high

·       The key issue for monetary policy is managing risks and uncertainties

·       The US central bank is not in a hurry to make the next monetary policy decision. It has become harder to forecast the outlook right now

·       It is essential to keep inflation expectations contained.

·       The University of Michigan inflation expectations data is an outlier

·       I take comfort in the stability of longer-term inflation expectations

·       I can't say yet what the clear impact of tariffs will be on inflation

·       The Central Bank has gotten more clarity on the Trump policy agenda

·       We're not in a hurry to make the next monetary policy move

·       I expect growth to slow in part due to lower immigration

·       The current modestly restrictive monetary policy is entirely appropriate

·       There is a lot of uncertainty in the economy and policy right now

·       The current rate policy fits with a solid job market and above-target inflation

·       Many different economic scenarios are possible right now

·       The disinflation process has followed a bumpy path

·       It is hard to know how the economy is going to perform

·       No signs inflation expectations are becoming unmoored

·       It was a natural step for the US central bank to slow the pace of its balance sheet drawdown

·       Data shows public believes near-term inflation rise will dissipate

·       The labor market started the year out better-balanced

·       The economy entered the year on a firm footing

·       Economic data has been sending mixed signals

·       The current modestly-restrictive policy is 'entirely appropriate'

·       Monetary policy is well positioned to achieve Fed goals

·       The Fed needs to be very focused on data right now

·       I am watching and collecting data about the impact of change in government policy

·       It is key to think about the longer-term impact of government policy changes

·       Assessing tariff impacts depends a lot on the details

·       The neutral rate is helpful, not a guide for monthly decisions

·       The 2% inflation target is not up for debate in the policy review process

·       More transparent communication is powerful and effective

The relevant text of a speech by the NY Fed President Williams: Certain Uncertainty on March 21, 2025

Uncertainty is the only certainty in monetary policy

The Economy Today

I will start with a snapshot of the U.S. economy. The economy entered the New Year on firm footing. GDP and job growth have been solid, propelled by robust gains in the labor force and productivity. After a period of cooling, a wide range of labor market indicators, including the unemployment rate, have stabilized, with supply and demand broadly in balance and the labor market no longer a source of inflationary pressure.

The disinflationary process has continued on a bumpy path toward the FOMC’s inflation goal of 2 percent over the longer run. After reaching a 40-year high of over 7 percent in 2022, inflation—as measured by the 12-month percentage change in the personal consumption expenditures price index—has fallen to about 2-1/2 percent, still somewhat above our 2 percent target.

Global Inflation Trends

Economists at the New York Fed have developed a statistical model, called Global Multivariate Core Trend Inflation (Global MCT), to measure and better understand the behavior of the persistent components of global inflation.

That’s where things stand now, but the future is highly uncertain. Recent data—both hard and soft—are sending mixed signals. My business and financial market contacts highlight the role of greater uncertainty, especially around trade policy, in making it more difficult to plan investments and hiring.

This analysis uncovers very strong common components of inflation, with global factors explaining an overwhelming share of the persistent movements in inflation rates across the economies in the sample, except for Japan’s. Importantly, these results are not driven by the pandemic and post-pandemic periods, as they are evident in pre-pandemic inflation data going back to 1990.

Analysis using this model finds that supply shocks were the primary driver of the rise and subsequent decline in global inflation trends over the past several years, both at the general and sectoral levels.6 From the beginning of 2021 to late 2022, the estimated global inflation trend soared, then reversed most of that increase over the following two years. Although supply factors were primarily responsible for these swings, demand factors also played a role in boosting the global inflation trend from late 2021 to mid-2024.

When inflation is a global phenomenon, what can individual central banks do to control it? Here again, Global MCT provides a useful lens to analyze this question. Based on an estimated vector autoregressive model that includes Global MCT, U.S. monetary policy shocks have economically and statistically significant effects on both the global inflation trend and the core goods global inflation trend. And the peak effect occurred after about 12 months. Similar results are obtained using a version of the model with European Central Bank monetary policy shocks.

These empirical analyses illustrate how monetary policy spills over and spills back to domestic and international rates of inflation. In the United States, as in other countries, monetary policy decisions are based on domestic mandates. But as policymakers, we also understand that our decisions can affect global economic and financial conditions, and in turn, can spill back onto our shores.

Inflation Expectations

In the past two months, we have seen clear signs of a broad-based increase in short-term inflation expectations, but most indicators point to continued well-anchored medium- and longer-term expectations. This analysis indicates that households expect an inflation shock will gradually decay over the ensuing years.

Monetary Policy Amid High Uncertainty

As I said at the start of my remarks, the economy entered this year in a good place, but there is a high degree of uncertainty about what the future holds. So, what does this all mean for monetary policy?

At its meeting on Wednesday, the FOMC decided to leave the target range for the federal funds rate unchanged at 4-1/4 to 4-1/2 percent. In the accompanying statement, the Committee noted that uncertainty around the economic outlook has increased, and it is attentive to risks to both sides of its mandate. The Committee reaffirmed its strong commitment to supporting maximum employment and returning inflation to its 2 percent objective and its policy decisions will be based on a careful assessment of the incoming data, the evolving outlook, and the balance of risks.

In addition, the Committee decided to slow the pace of reduction in its holdings of securities. The ongoing process of balance sheet reduction follows the principles and plans laid out in 2022. Last June, the Committee took a first step in slowing the pace of balance sheet reduction. That process has progressed very well, resulting in a reduction of over $2 trillion in our securities holdings so far. This week’s decision to slow it further is a natural next step to smooth the transition from abundant reserves to a level that is somewhat above ample. This action has no implications for our intended stance on monetary policy and should not affect the size of our balance sheet over the medium term.

The Economic Outlook

Turning to the U.S. economic outlook, I expect GDP growth this year to step down from last year’s pace in part because of a slowdown in labor force growth due to lower immigration rates. But it’s hard to know with any precision how the economy will evolve. Uncertainty is high, and many scenarios could play out, depending on fiscal and trade policies and geopolitical and other developments.

In the Summary of Economic Projections that the FOMC released this week, the central tendency of projections for GDP growth this year was between about 1-1/2 and 2 percent, and for inflation, between about 2-1/2 and 3 percent. Any of these outcomes—or even some others outside these ranges—seem completely plausible to me.

In addition, it is hard currently to assign probabilities to these scenarios. This is something economists refer to as Knightian uncertainty. In these circumstances, it will be important to take a holistic view in monitoring and assessing all available information. It is also fitting to take a risk management perspective in assessing the economic outlook, evaluating the appropriate stance of monetary policy, and making policy decisions.

Conclusion

There is certain uncertainty in monetary policy. The current modestly restrictive stance of monetary policy is entirely appropriate given the solid labor market and inflation still running somewhat above our 2 percent goal. It also positions us well to adjust to changing circumstances that affect the achievement of our dual mandate goals. Whatever the economy has in store for us, I am committed to supporting maximum employment and returning inflation to our 2 percent objective.”

Analysis of Fed’s Williams speech on March 21, 2025:

Current Monetary Policy Stance: To be on hold till at least May’25

Williams described the Federal Reserve's current monetary policy as "modestly restrictive" and emphasized that this stance is "entirely appropriate" given the present economic conditions. He highlighted that the policy aligns with a "solid" labor market and inflation that remains above the Fed’s 2% target. This suggests that Williams views the current interest rate level—set between 4.5% and 4.75% as of late 2024—as suitably positioned to balance economic growth, employment, and inflationary pressures (price stability) without necessitating immediate adjustments.

Economic Outlook and Growth Projections: Stagflation

Williams anticipates a slowdown in U.S. GDP growth in 2025 compared to the pace observed in 2024. He attributed this expected deceleration partly to lower immigration, which could reduce labor force growth and, consequently, economic output and also private consumption. While he did not provide a specific growth figure in the available excerpts, his earlier forecasts projected real GDP growth around 2% for 2025 and 2026, near his estimate of the economy’s long-run potential. This indicates a consistent expectation of moderate but stable growth. Williams expects GDP growth to slow down in 2025 compared to the previous year, partly due to lower immigration rates affecting labor force growth, and consumer spending.

Inflation Expectations: Despite short-term worries, quite confident about a 2% mid to long-term outlook

A notable point from the speech is Williams’ reassurance that there is "no sign inflation expectations [are] becoming unmoored." This reflects confidence in the Fed’s ability to maintain credibility with the public and markets regarding its 2% inflation target. Stable inflation expectations are critical for the Fed, as unanchored expectations could lead to self-reinforcing price increases, complicating efforts to achieve price stability. He highlighted that inflation expectations remain anchored, but there are risks of higher inflation and slower growth.

Tariffs and Inflation: May be transitory

Williams mentioned that it's too early to gauge the full impact of tariffs on inflation, as the effects depend on various economic factors. He noted an increase in short-term inflation expectations following tariff announcements but emphasized that long-term expectations remain stable; i.e. Williams also views any Trumpflation or higher imported inflation may be transitory.

High Economic Uncertainty and Risk Management: Fed not in a hurry to cut rates

Williams underscored the "high uncertainty" in the economy and policy landscape, citing mixed economic data and potential external factors such as fiscal and trade policies or geopolitical developments. He emphasized a risk-management approach to monetary policy, noting that both downside risks to the economy and upside risks to inflation are "very high." This suggests the Fed is not in a hurry to make its next policy move and will rely heavily on incoming data to assess risks and uncertainties.

Labor Market Conditions: The Fed may not worry until the unemployment rate surges meaningfully above 4.5%

Williams characterized the labor market as "solid," aligning with his prior statements in 2025 where he noted the market had returned to balance. While specific unemployment figures were not detailed in the March 21 speech excerpts, his earlier projections suggested a stable unemployment rate of around 4% to 4.3%. The reference to a solid job market indicates resilience despite anticipated growth moderation.

Balance Sheet Policy: Will ensure no funding market stress, while doing QT under the Trump trade war like in late 2019

Williams addressed the Fed’s ongoing balance sheet runoff, describing the decision to slow this process as a "natural next step." This refers to the quantitative tightening (QT) process, where the Fed reduces its securities holdings. He has previously noted that the Fed had reduced its holdings by over $1 trillion without adverse market effects, and this update suggests a cautious adjustment to ensure financial stability as reserves remain ample.

Policy Implications:  Wait & Watch

Williams’ remarks signal a continuation of the Fed’s data-dependent approach, with no immediate indication of any rate actions/cuts. The "modestly restrictive" policy stance implies the Fed believes it has room to monitor developments without urgent action, consistent with his earlier 2025 statements, where he avoided committing to near-term policy changes amid tariff-related inflation risks.

Economic Context:  Trump’s hawkish immigration policies may affect US economic growth and tightening labor market, causing wage inflation

The acknowledgment of slower growth due to lower immigration introduces a demographic factor into the Fed’s considerations, reflecting real-world shifts that could influence long-term potential output. This aligns with broader economic discussions in 2025 about labor supply constraints.

Economic Uncertainty:

Williams stressed that uncertainty is high due to rapid changes in immigration, trade, and fiscal policies, which could impact economic growth, labor market, and inflation. He noted that predicting the economy's trajectory is challenging due to these policy uncertainties and ongoing geopolitical developments/uncertainties.

Inflation Focus: The last mile of disinflation is always hard, especially under any Trumpflation scenario

William’s emphasis on stable inflation expectations reinforces the Fed’s commitment to its 2% target, a recurring theme in his earlier speeches, where he projected inflation to decline to 2% in the coming years. However, the "bumpy path" toward this goal, as noted earlier in the year, remains a challenge given above-target inflation.

Uncertainty and Caution: The Fed is avoiding a direct war of words with Trump about the potential impact of his draconian policy

The repeated focus on uncertainty and a risk-management perspective highlights Williams’ pragmatic stance. This approach is likely influenced by ongoing debates about trade policies (e.g., tariffs) and their potential inflationary impact, as well as global economic trends, though he did not elaborate on specifics like tariffs in the March 21 speech.

Monetary Policy Stance

Williams described the current monetary policy as "modestly restrictive," which he believes is "entirely appropriate" given the robust labor market and inflation slightly above the 2% target. He emphasized that there is no immediate need to adjust interest rates, suggesting that the Fed should "collect more data" before making any changes.

Fed is quite cautious about Trump's policy uncertainty

In summary, Williams' speech underscored the Federal Reserve's cautious approach to monetary policy amid significant economic uncertainty under President Trump. The Fed maintains a modestly restrictive stance, which is deemed appropriate given current conditions.

Williams’ speech on March 21, 2025, portrays a Federal Reserve that is cautiously optimistic about the U.S. economy’s resilience but acutely aware of uncertainties that preclude firm policy commitments. His depiction of a "solid" labor market, stable inflation expectations, and a "modestly restrictive" policy stance suggest a steady-hand approach, with adjustments to the balance sheet runoff indicating fine-tuning rather than a shift in direction. The speech reflects a central banker navigating a complex landscape, prioritizing data and risk assessment over premature action, consistent with the Fed’s broader strategy in 2025 as it pursues its dual mandate.

In his March 21, 2025 speech, the NY Fed President Williams discussed the heightened uncertainty in the current economic landscape, emphasizing the challenges in forecasting due to various unpredictable factors. He highlighted that while the U.S. economy began the year robustly—with solid GDP and job growth—recent data presents mixed signals about future trends. Regarding inflation, Williams observed a recent uptick in short-term inflation expectations across multiple measures, including market-based indicators and surveys conducted by the New York Fed. However, he pointed out that medium- and long-term inflation expectations remain well-anchored, suggesting that while current inflationary pressures exist, they are not anticipated to persist in the long run.

On Friday, March 21, 2025, Chicago Fed’s President Goolsbee said:

·       When you have a lot of uncertainty you have to wait for things to clear up

·       There has been a decided turn towards anxiety and waiting on capital spending among business contacts

·       Businesses have anxiety, waiting on capex amid tariff uncertainty

·       Current conditions may maybe a shock to the economy depending on how long they last

·       Markets want information fast but that is not realistic at this moment

·       There is still a lot of strength in the economy right now

·       Unemployment and inflation do reflect progress toward the dual mandate

·       Before judging how monetary policy reacts to tariffs, the Fed needs to know how long the tariffs last, possible retaliation, pass through to consumers

·       Imports are only 11% of GDP, so one-time tariffs that are not followed by retaliation are more likely to be transitory

·       The bigger they are and the more like supply shocks they are the harder it will be for the Fed to look through them

·       We need to be careful when you say transitory, the answer to what "transitory" means this time around is whether the tariffs apply to intermediate goods, stoke retaliation, and other factors

·       I still believe the economy is resilient and if there is progress on inflation rates will be lower in 12 to 18 months

·       When there is uncertainty it is a time to get as much data as possible

·       The longer the Fed waits it may mean the cuts have to be back loaded, there can be a cost to waiting

·       Beyond tariffs, the Fed also has to think about coming tax cuts and other issues

·       A slowdown in the economy would be a reason to cut, but if inflation rises beyond the tariffs, or hits expectations, the Fed would have to revise the outlook

·       The Fed's commitment to 2% inflation is rock-solid

·       If market expectations of long-run inflation start rising the Fed would have to act

·       There is nothing more uncomfortable than a stagflationary environment; there is no generic answer to it

·       Business contacts are waiting on capital spending in light of tariffs

·       The response to stagflation would depend on a number of factors, but expectations would be very important

·       Responding to stagflation depends on the hit to inflation and jobs

·       Tariffs raise prices and reduce output, which is a stagflationary impulse

·       The hard data right now are not the stagflation of the 1970s, but it is uncomfortable when inflation and unemployment are both moving higher

·       Uncertainty could feed into company capital plans, and also sap confidence

·       Evidence is mixed on how sentiment influences activity, but contacts in the Midwest say confidence is changing how they behave

·       Sees rate cuts depending on inflation progress

Analysis of Fed’s Goolsbee comments on March 21, 2025

Uncertainty and a Wait & Watch Approach

Goolsbee emphasized that "when you have a lot of uncertainty, you have to wait for things to clear up." This reflects a cautious stance, suggesting the Fed should avoid premature policy shifts until economic conditions become more predictable. He noted a "decided turn towards anxiety and waiting on capital spending among business contacts," indicating that businesses are hesitant to invest amid current economic ambiguity—potentially due to factors like proposed tariffs, immigration, and fiscal policy changes, or geopolitical risks.

Economic Conditions as a Potential Shock: Stagflation may be imminent

He described current conditions as "maybe" a shock to the economy, with the impact depending on "how big and how persistent" the disruptions prove to be. This ambiguity highlights his focus on assessing the magnitude and duration of emerging risks rather than committing to immediate action, aligning with the Fed’s data-dependent approach.

Interest Rate Outlook

Goolsbee expressed optimism about potential interest rate cuts, contingent on continued progress in managing inflation. He suggested that if inflation remains under control, interest rates could be lower 12 to 18 months from now.

Long-Term Rate Outlook: Maintains his known dove stance for a longer-term rate

Goolsbee expressed confidence that "rates will be lower in 12-18 months from now" if inflation continues to progress toward the Fed’s 2% target. This reaffirms his dovish perspective, consistent with earlier 2025 statements (e.g., his expectation of a 100-basis-point cut over the year, as noted in December 2024). However, he avoided specifying the timing of the first cut, maintaining flexibility.

Inflation and Stagflation Risks: Sounded like a hawk, but also termed Trumpflation as temporary if there is no severe retaliation

Addressing stagflation concerns—a scenario of high inflation and stagnant growth—Goolsbee said the Fed’s response would depend on the "hit to inflation and jobs." He warned that "if market inflation expectations rise, the Fed would have to act," signaling readiness to tighten policy if inflationary pressures re-emerge unexpectedly. Conversely, he suggested that "one-time tariffs without retaliation [are] likely transitory," implying that temporary price shocks might not warrant a sustained policy shift unless they trigger broader inflation expectations.

Steady-Hand Approach: Short-term volatility and long-term stability

Goolsbee underscored the Fed’s role as a "steady hand" that must "take a long view on the economy." This reflects his belief in avoiding knee-jerk reactions to short-term volatility, prioritizing stability over rapid adjustments—a stance that contrasts with market speculation of imminent rate cuts

Policy Implications: Fed hawks and doves are synchronizing on wait & watch policy

Goolsbee’s remarks signal a continuation of his dovish outlook—he still anticipates rate cuts over the next 12-18 months—but tempered by caution due to uncertainty. His reluctance to commit to specific timing (e.g., a March 2025 cut) contrasts with market expectations and aligns with other Fed officials (e.g., John Williams and Raphael Bostic) who, later in 2025, also sought to moderate aggressive rate-cut bets. This suggests a unified Fed narrative of patience post-Powell’s March 19-20 FOMC meeting, where rates were held at 4.75%-5.00%

Economic Context

The "anxiety" among business contacts and potential "shock" to the economy likely stem from external factors like tariff proposals under discussion in early 2025 or fiscal policy shifts following the 2024 election cycle. Goolsbee’s focus on capital spending hesitancy points to a cooling in investment-driven growth, which could ease inflationary pressures but also risks slowing the economy if prolonged.

Inflation Dynamics

His comments on inflation expectations and tariffs reveal a nuanced view. While he sees one-off tariff effects as manageable, a rise in market expectations would prompt action—consistent with his prior emphasis on housing inflation as a key indicator. This suggests he remains vigilant about upside inflation risks despite his dovish bias toward eventual easing.

Tariff Concerns

Goolsbee highlighted growing concerns among businesses in his region about the impact of tariffs, which could lead to higher prices and reduced economic output. However, he noted that the current economic conditions do not resemble the stagflation of the 1970s due to low unemployment and inflation within the low 2% range. Tariff Impact: Goolsbee's comments on tariffs highlight their potential to create stagflationary pressures, though he distinguished the current situation from historical stagflation scenarios due to favorable employment and inflation metrics.

Trump Policy Uncertainty

Goolsbee emphasized the need for clarity on policy matters, particularly tariffs and fiscal policies, to guide monetary decisions. He advocated for a cautious approach, stating that it is prudent to wait for policy clarity in times of significant uncertainty.

Contrast with Prior Statements

Compared to his September 2024 remarks anticipating "many more rate cuts" to achieve a soft landing, Goolsbee's March 21 tone is more reserved. The shift from proactive easing to a wait-and-see posture may reflect evolving Trump policy uncertainty—possibly softer growth signals or persistent inflation above 2%—since the Fed’s 50-basis-point cut in September 2024.

Economic Environment

The current economic environment is characterized by uncertainty, with mixed signals from economic data and rising policy uncertainty. Despite this, Goolsbee noted the economy's resilience, with a strong labor market and inflation near the Fed's target.

Cautious Monetary Policy

Goolsbee's remarks underscore the Federal Reserve's cautious stance on monetary policy. This caution is driven by uncertainty surrounding government policies, particularly tariffs, which could impact inflation, employment, and economic growth.

Future Rate Adjustments

The prospect of future rate cuts depends on sustained progress in controlling inflation. Goolsbee's optimism about lower rates in the future reflects the Fed's commitment to its dual mandate of minimum price stability and maximum employment.

Fiscal Policy Interconnectedness

Goolsbee stressed the importance of clarity on fiscal policies, as these directly influence the economic environment and, consequently, monetary policy decisions. This interconnectedness underscores the complexity of current economic decision-making.

In summary, Goolsbee’s March 21, 2025, speech portrays a Federal Reserve official balancing optimism about eventual rate cuts with caution amid economic uncertainty. His emphasis on waiting & watching for clarity, monitoring inflation expectations, and maintaining a long-term perspective underscores a pragmatic, data-driven approach. While reaffirming his belief in lower rates over the next 12-18 months, Goolsbee avoids locking into a near-term move, reflecting the Fed’s broader strategy of navigating a complex landscape without overreacting to immediate pressures. His remarks suggest the Fed will remain flexible, with policy hinging on how persistent current uncertainties prove to be, making upcoming data releases (e.g., inflation and jobs reports) critical for his and the FOMC’s next steps.

Goolsbee's comments on March 21, 2025, emphasized the Federal Reserve's cautious approach to monetary policy amidst significant economic uncertainty. His comments highlighted the potential for future interest rate reductions if inflation remains under control, while also emphasizing the need for clarity on fiscal policies to guide these decisions effectively. The ongoing impact of tariffs and policy unpredictability continues to shape the Fed's cautious stance.

Goolsbee discussed the potential inflationary effects of newly imposed tariffs. He suggested that if these tariffs and retaliatory tariffs are limited in scope, their impact on inflation could be transitory. This perspective implies that the Federal Reserve may not need to adjust monetary policy in response to such temporary price increases. Goolsbee emphasized the importance of distinguishing between temporary and persistent inflationary pressures when formulating monetary policy. He noted that reacting to short-term, tariff-induced inflation could lead to unnecessary policy adjustments. Instead, he advocated for a measured approach, monitoring economic indicators to assess whether inflationary trends are enduring before implementing policy changes.

This stance aligns with his earlier comments from February 25, 2025, where he highlighted the need for greater clarity on the economic impacts of various policies before considering rate cuts. At that time, Goolsbee indicated that the Federal Reserve was in a "wait-and-see" mode, seeking to understand the full effects of new policies, including tariffs, on the economy.

Conclusions:

Fed sees stagflation as it projects lower economic (GDP) growth, higher inflation, and a higher unemployment rate for 2025. Fed Holds Rates as unanimously expected; signalled further tapering of QT and virtually blamed Trump policy uncertainty for the stagflationary US economic outlook.

On March 19, 2025, Fed presser, Chair Powell sounded less hawkish on Trump tariffs and the Trumpflation narrative. Powell was cautious in his assessment of how President Trump's trade war might shape the economy, citing the possibility that tariffs' impact on consumer prices would be ‘transitory’. Overall, Powell played safe and avoided a direct head-on collision with Trump on fiscal policy issues.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, US Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed needs to bring down average core inflation by around 100 bps to reach the target.

Fed is now cutting rates while doing QT, which is two contra monetary policy tools. As a result, bond yields remain elevated at around 4.50% and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance in line with regular Fed talks and official dot plots.

Thus Fed may effectively close the QT first by September-December’25 at a B/S size of around $6.50T from present levels of around $6.75T. From April’25, the Fed will reduce QT rates from $25B to only $5B, which is not significant and may finally close the QT for USTs by June-December’25, while the MBS run-off (MBS-QT) will go on at the official pace of $35B/M. Nowadays, UST matters to US bond yield, not MBS.

Thus Fed will permanently remove MBS from its balance sheet to replace it with USTs in the future in a calibrated manner, which may be equivalent to a mini-QE.  Fed may keep the B/S size at around $6.50T, which would be 22% of projected nominal GDP around $30T by 2025, which may be an ideal level for the Goldilocks nature of the US economy and may not cause another REPO/Funding market crisis as we have seen late 2019 under Trump and Powell-1.0. Now Fed is effectively in the last stage of QT tapering or balance sheet run-off for USTs.

To fight a highly probable US stagflation or even recession-like economic situation amid the Trump trade war tantrum, the Fed may first close QT fully by September-December’25 and also resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its June-September’25 meeting and close the same by September-December’25 and also cut rates by 25 bps each in June and December’25. But if the concern of a Trumpcession intensifies further and the employment situation deteriorates meaningfully (unemployment surges over 4.5%), the Fed may also cut another 25 bps in September’25. At the present run rate and any potential impact of moderate Trump trade war after H1CY25, the US core inflation may dip towards 2.0% targets by mid to late 2026.

Fed already cut 100 bps in late 2024 (September-December), anticipating Trump 2.0 and policy uncertainty. Fed may have cut 50 bps in September 2024 in an unusual panic cut after Trump’s election-winning probability started beginning to surge and beat Harris by July amid two consecutive ‘assassination attempts’ on his life. Thus Fed now has the policy space and time to wait & watch till at least H1CY25.

Bottom line

Fed policymakers doves, hawks and also owls are now synchronizing and preparing the market for wait & watch at least till June’25.

Weekly-Technical trading levels: DJ-30, NQ-100, and Gold

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42300) now has to sustain over 42500 for a further rally towards 42700/42900-43200/43500 and 43700/44050 and 44250/44400-44500/44800 and 45000/45200-45300/45500 and even 45700/45800-45900/46000 in the coming days; otherwise sustaining below 42400, DJ-30 may again fall to 42000/41500-40900/39500 and 38700-36100 in the coming days.

Similarly, NQ-100 Future (19900) has to sustain over 20200-21050 for a further rally to 21300/21500-21700/21850 and 22050/22200-22350/22500 and 22700/23000-23300/23500 in the coming days; otherwise, sustaining below 21000, NQ-100 may again fall to 20900/20600-20400/20150 in the coming days.

Also, technically Gold (CMP: 3025) has to sustain over 3075-3100 for a further rally to 3125/3150-3200/3225; otherwise sustaining below 3065-3025, Gold may again fall to 2990 and 2965/2925-2900/2880 and 2850/2835-2810/2780-2780 and 2745/2725-2695/2665 and further 2635/2600-2585/2560 in the coming days.