Economics Daily: Mr. Careful

Federal Reserve Chair Jerome Powell last year emphasized the need to be "careful" in setting interest rates so often that he seemed to be trying out for a role as a Mr. Careful addition in the Mr. Men children's book series. Then in December, he arguably set caution aside in telegraphing the Fed was moving decisively toward lowering rates. Unfortunately, that pivot came just before a re-acceleration of inflation in the early months of 2024. On Wednesday, Powell effectively showed some scars from that experience. Hours before his post-policy decision press conference, May consumer price index data showed an encouraging slowdown. But he highlighted the economy had repeatedly surprised forecasters. There had been a "pause in progress" in inflation in the first quarter. After having tried to set aside hot January and February price reports, "we got a third month, and we said 'OK the signal we're taking is that we think it's going to take longer'" to be confident inflation is heading to the 2% target — which would in turn allow for rate cuts — Powell said. That setback helps explain why policymakers Wednesday removed two of the rate cuts they penciled in for 2024 back in March. The new projections show one reduction by year-end. As to what was behind that shift, Powell said, "the big thing that changed was the inflation forecast." Fed officials' new median estimate for the core year-end inflation rate is at 2.8% — which is just where it was in April. In other words, policymakers' new forecast suggests no further disinflation, at least by that measure. Powell said it was a "conservative" forecast. It will take additional improvement in inflation, or an unexpected deterioration in the job market, to finally trigger a rate cut, Powell said. Jerome Powel. Photographer: Al Drago/Bloomberg Half a year after his comments helped to stoke rallies in Treasuries and risk assets, the chair also highlighted sensitivity to the impact that the initial Fed rate cut — whenever it comes — will have. "When we do start to loosen policy, that will show up in a significant loosening of financial conditions,'' he said. "It's a consequential decision for the economy, and you want to get it right." In sum, Michael Feroli, chief US economist at JPMorgan Chase & Co., said that "unlike in recent press conferences, Powell was not especially dovish" this time. As has often been the case, markets rallied on Fed-day Wednesday. But this time it wasn't due to Powell and the Fed statement — it was the tame CPI report that did it. The S&P 500 index closed at a lower level that it had been trading before the Fed announcement. Two-year Treasury yields were also higher at the end of the day than before the Fed and Powell. "The more hawkish he is now, keeping financial conditions in check, the better odds he has of actually lowering rates in the second half of the year," Marc Sumerlin, founder of Evenflow Macro in Washington, said in a note.