Fed’s Powell indicated no hurry to cut rates before June’25

·       Wall Street, Gold stumbled on hotter than expected core inflation and less dovish Powell Testimony but recovered later on hopes of tariffs waiver

On Tuesday, some focus of the market was also on Fed Chair Powell’s Congressional (Senate) testimony apart from the ongoing Trump trade war tantrum. On Tuesday (11th Feb’25), Federal Reserve Chair Powell delivered the semiannual Monetary Policy Report to Congress, addressing the current economic landscape and the Federal Reserve's policy stance.

Economic Overview:

·       Growth and Consumer Spending: The U.S. economy expanded by 2.5% in 2024, driven by resilient consumer spending.

·       Labor Market: The labor market remains solid, with payroll job gains averaging 189K per month over the past four months. The unemployment rate has been steady at 4% since mid-2024.

·       Price Stability: Inflation has eased significantly over the past two years but remains somewhat elevated relative to the Federal Reserve's 2% longer-run goal.

Monetary Policy Stance:

Chair Powell emphasized that, given the current economic strength and progress toward the Federal Reserve's goals, there is no immediate need to adjust the policy stance. He stated, "With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance."

The Federal Reserve is not in a hurry to lower interest rates, as the current policy stance is considered less restrictive, and the economy remains strong. Powell cautioned that reducing policy restraint too quickly could hinder progress on inflation while acting too slowly could weaken economic activity and employment. The Fed will assess incoming data, the evolving outlook, and the balance of risks when considering adjustments to the target range for the federal funds rate.

Interest Rates:

The Federal Open Market Committee (FOMC) has reduced the policy rate by a full percentage point (100 bps) since September 2024, following a period of maintaining the target range for the federal funds rate at 5.25% to 5.5% for 14 months. Powell noted that this recalibration was appropriate given the progress on inflation and the cooling labor market. He cautioned against reducing policy restraint too quickly, as it could hinder progress on inflation.

Dual Mandate: The Federal Reserve remains focused on achieving its dual-mandate goals of maximum employment and stable prices. Powell stated that the Fed is attentive to the risks on both sides of this mandate and that policy is well-positioned to deal with the risks and uncertainties.

Monetary Policy Review: The Fed is conducting its second periodic review of its monetary policy strategy, tools, and communications, with a focus on the FOMC's Statement on Longer-Run Goals and Monetary Policy Strategy. However, the Committee's 2 percent longer-run inflation goal will be retained and will not be a focus of the review.

Trade Policies:

In response to questions about recent tariff implementations by the Trump administration, Powell acknowledged the standard case for free trade but emphasized that the Federal Reserve's role is to react to how trade policies impact the economy rather than comment on them. While Powell did not address tariffs in his prepared remarks, he reiterated that it is not the Fed's role to engage in trade policy but to formulate an appropriate monetary policy based on its likely impact on the economy.

Economic Assessment Powell noted that the economy is strong overall, with a solid labor market and inflation moving closer to the 2 percent goal, though still somewhat elevated. GDP rose 2.5 percent in 2024, supported by robust consumer spending

Digital Currency:

Addressing inquiries about a potential central bank digital currency (CBDC), Powell firmly stated that the Federal Reserve will not introduce its digital currency while he remains in his position. He highlighted skepticism about the advantages of a CBDC, noting the existing capabilities of electronic transfers within the banking system.

Fed’s Independence: Powell has reiterated the importance of Fed independence and also pointed out again that the Fed is answerable only to the US Congress.

Congressional Scrutiny: Powell's appearance before Congress includes the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. He is likely to be questioned on topics such as crypto regulation, banking regulation, and allegations of "de-banking"

Trump Administration Policies: Powell has also avoided any direct comments for merit/demerit of President Trump’s policies, including tariffs, deportations, and regulatory rollbacks; but also pointed it these could influence prices, the labor market, economic growth prospects, and monetary policy moving forward.

In summary, Chair Powell conveyed a message of cautious optimism, indicating that the Federal Reserve is prepared to maintain its current policy stance in response to evolving economic conditions while remaining vigilant to potential risks and uncertainties.

Full Text of Fed Chair Powell’s opening remarks: February 11, 2025- Testimony

Semiannual Monetary Policy Report to the Congress: Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C.

Chairman Scott, Ranking Member Warren, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve's semiannual Monetary Policy Report.

The Federal Reserve remains squarely focused on achieving its dual-mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years. Labor market conditions have cooled from their formerly overheated state and remain solid. Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated. We are attentive to the risks on both sides of our mandate.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook

Recent indicators suggest that economic activity has continued to expand at a solid pace. Gross domestic product rose 2.5 percent in 2024, bolstered by resilient consumer spending. Investment in equipment and intangibles appears to have declined in the fourth quarter but was solid for the year overall. Following weakness in the middle of last year, activity in the housing sector seems to have stabilized.

In the labor market, conditions remain solid and appear to have stabilized. Payroll job gains averaged 189,000 per month over the past four months. Following earlier increases, the unemployment rate has been steady since the middle of last year and, at 4 percent in January, remains low. Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a wide set of indicators suggests that conditions in the labor market are broadly in balance. The labor market is not a source of significant inflationary pressures. The strong labor market conditions in recent years have helped narrow long-standing disparities in employment and earnings across demographic groups.

Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in December, and, excluding the volatile food and energy categories, core PCE prices rose 2.8 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. Since last September, the Federal Open Market Committee (FOMC) lowered the policy rate by a full percentage point from its peak after having maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent for 14 months. That recalibration of our policy stance was appropriate in light of the progress on inflation and the cooling in the labor market. Meanwhile, we have continued to reduce our securities holdings.

With our policy stance now significantly less restrictive than it had been and the economy remains strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

As the economy evolves, we will adjust our policy stance in a manner that best promotes our maximum-employment and price-stability goals. If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor markets were to weaken unexpectedly or inflation was to fall more quickly than anticipated, we can ease policy accordingly. We are attentive to the risks to both sides of our dual mandate, and policy is well-positioned to deal with the risks and uncertainties that we face.

This year, we are conducting the second periodic review of our monetary policy strategy, tools, and communications—the framework used to pursue our congressionally assigned goals of maximum employment and stable prices. The focus of this review is on the FOMC's Statement on Longer-Run Goals and Monetary Policy Strategy, which articulates the Committee's approach to monetary policy, and on the Committee's policy communications tools. The Committee's 2 percent longer-run inflation goal will be retained and will not be a focus of the review.

Our review will include outreach and public events involving a wide range of parties, including Fed Listens events around the country and a research conference in May. We will take on board lessons of the past five years and adapt our approach where appropriate to best serve the American people, to whom we are accountable. We intend to wrap up the review by late summer.

Let me conclude by emphasizing that at the Fed, we will do everything we can to achieve the two goals Congress set for monetary policy—maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission.”

Highlights of Powell’s comments at the Semi-Annual Congressional Testimony (Senate): 11th Feb’26

·       Don't see any reason to be in a hurry to lower rates

·       Powell squashes the possibility that the Fed will develop its digital currency

·       US won't have CBDC while I am Fed chair

·       I commit that we will never have a central bank digital currency

·       I support efforts to create a regulatory framework around stablecoins

·       Overall aggregate numbers on the economy are very very good

·       Whether the cost of tariffs reaches the consumer depends on factors we haven't seen yet

·       It’s not obvious that lower rates would lead to lower housing inflation

·       Manufacturing is a smaller part of the economy than before, though still important (on lingering manufacturing recession)

·       I don't believe Musk or the team has tried to access Fed systems

·       Concern for the labor market has diminished considerably since mid-last year

·       I believe the neutral rate has risen from the very low pre-pandemic level

·       It remains to be seen what tariff policies will be implemented, I don't know the effects

·       Powell signaled banking regulations might be due for reassessment

·       Even when rates drop, we still will have a housing shortage

·       Not for me to say if we've experienced a soft landing; but we have not experienced a hard landing

·       The Fed can't control long rates

·       The view of risks on the budget deficit and inflation expectations are among the drivers of long-term rates.

·       I stand by previous comments that countries that have free trade grow faster.

·       It is not for the Fed to comment on tariff policy.

·       The standard case for free trade still makes sense but didn’t work that well when we had one large country that didn’t play by the rules

·       It's not allowed under the law for the President to remove a Fed board member

·       Reserves are still abundant

·       We would use quantitative easing only when rates are at zero

·       Fed is not in a hurry to use QE again until it exhausts all the other options and rates are reduced to almost zero

·       Fed will continue QT until it feels the banking system has abundant reserves

·       I want to make more progress on inflation

·       I want to make more progress on inflation

·       We are in a pretty good place with this economy

·       don't see any reason to be in a hurry

·       High mortgage rates are less related to Fed policy but to Treasury yields

·       We are not in a recession

Further, Powell said on his 2nd day of Congressional Testimony Wednesday (12th Feb’25)

·       IN HINDSIGHT, PROBABLY COULD'VE HALTED QE EARLIER

·       Wants to see more progress on inflation

·       Did not see much progress on core inflation last year

·       The luxury of being able to wait for progress on inflation given the strong economy

·       labor supply from immigration came down sharply in H2 last year. Expect more of that going forward.

·       Have to see how supply and demand and labor matchup

·       Making clear progress on housing services inflation but not there yet

·       The last few job reports have shown significant job creation, which may have tipped up at and of the year.

·       Offer a note of caution on today's CPI reading. We target PCE inflation which is a better measure

·       We will know what PCE readings are late tomorrow after the PPI data

·       The dot plot is NOT forward guidance.

·       If DOGE cut $1 trillion off spending, hard to say how it would affect the economy.

·       The best thing we can do is to achieve price stability, maximum employment

·       Will tell the House Financial Services Committee should anyone from DOGE try to access Fed systems.

·       We control access to our payment systems very carefully

·       Commercial real estate has lots of embedded losses but it does not seem to be getting worse

·       The markets are not pricing in higher inflation but may be pricing in the risk of it

·       The increase in LT rates is mostly not about inflation or Fed policy

·       Today's inflation print shows we're close but not there yet on inflation

·       We want to keep policy restrictive for now

·       We have to wait and see what the effects of policies are before we can think about what we will do.

·       There is uncertainty over policy

·       The underlying economy is very strong

Conclusions:

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, 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 will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by December’25 and then 2.0% core inflation and 3.5% unemployment rate by December’26 to achieve its mandate of maximum employment and price stability.

As US core inflation almost stalled in Q4CY24 at around +3.1% on average, while the unemployment rate remains stable at around 4.1% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed should have paused in December to asses more data and Trump policies on inflation and employment. But the Fed cut 25 bps in Dec’24 too (after September and November) to make up for previous policy mistakes and be able to be ahead of the curve despite core disinflation almost stalled in H2CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

Despite unfavorable data, and Trump policy uncertainty Fed cut on 18th December’24 to catch up with synchronized global easing and also to keep differential with ECB, which cut -100 bps in 2024. Fed may have also made a policy mistake by not cutting rates by 50 bps in H1CY24 and thus cut an additional 50 bps in H2CY24 to catch up. 

In H1CY25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. 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 close the QT first by June’25 at B/S size around $6.60-6.50T from present levels of around $6.89T. Fed may keep the B/S size around 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.

Fed may first close QT by June’25 and then resume the rate cut cycle for 50 bps cumulative in 2025. Fed may provide a definitive plan to end the QT in its March’25 meeting and close the same by June’25 and cut rates by 25 bps each in June and Dec’25.

Market impact:

On Wednesday, Wall Street Futures, Gold stumbled on hotter than e4xpected core CPI inflation data and less dovish Powell talks; but recovered later to some extent after House Speaker Johnson indicated selected tariff exemption. Also, Ap0ple, Tesla and CVS Health helped; NQ-100 closed in green.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 44650) now has to sustain over 45300-45500 any further rally; otherwise sustaining below 45200, DJ-30 may again fall to 44500/44100-43700/43300 and 42800/41900 and further 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (21900) has to sustain over 22200-22300 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22100, NQ-100 may again fall to 21700/21300-21100/20700 and further 20500/20300-20100/19250 in the coming days.

Also, technically Gold (CMP: 2900) has to sustain over 2850 for a further rally to 2875/2895-2905/2930 and 2950/2975-3000/3025; otherwise sustaining below 2840-2825 may again fall to 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.