Slowing their roll

What’s the rush? With this sentiment, Federal Reserve Governor Waller succinctly summed up the most policymaker’s thinking about the course of rate-cutting policy last week. 

Stepping back from the daily market trenches, perhaps this strategy is not the worst thing in the world because it reflects a surprisingly strong economy so far in 2024. Fears of recession have been allayed, or perhaps delayed, as real-time indicators continue to point to resilient growth and solid labor markets. Inflation has not cooperated just yet. While well off its recent peak, it has stabilized around 3% since mid-2023, which is too high for the Fed's liking. If policymakers were to cut short-term rates in this environment, price pressures could increase, undercutting their hard-won confidence they can finish the job of defeating inflation. That’s the Fed’s reference point that Chair Powell has cited—that in the 1970s they relaxed too soon, allowing inflation to become embedded, which required harsher action later. 

For now, markets are focusing on incoming data as a lead-up to the next Fed meeting on March 20. Any change to its quarterly updated economic projections may be minor, since expectations for cuts got overheated into early January, before capitulating to the roughly three rate cuts the Fed had forecast at its December meeting. Perhaps good things do come to those who wait…long enough.