Federal Reserve Policy Update: Following Through on the Powell Pivot

Key Takeaways:

  • From supercore to mainstream measures and lagging indicators to preemptive cuts before inflation hits target;
  • the U.S. Federal Reserve (Fed) may finally have changed its focus from lagging indicators that are akin to driving forward while looking in the rearview mirror, to looking ahead through the windshield.
  • This is good news for the U.S. as it increases the chances that the Fed’s policy tightening will not cause a recession.

In December of last year, the Fed moved from discussing supercore inflation, which is core services inflation excluding housing, to focusing on more mainstream inflation measures including the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE). Both of these measures have shown more progress on taming inflation than supercore. At the same time, the Fed announced that it was expected to reduce short-term interest rates by 0.75% during 2024. This shift became known as the Powell Pivot, named after Fed Chairman Jerome Powell, who stated that the Fed will begin reducing short-term interest rates before the Fed’s 2% average inflation target is met.

Exhibit 1: Participants Target Sept. 2023, Dec. 2023, March 2024

With its latest policy announcements, the Fed has followed through on the Powell Pivot by announcing that it continues to expect to reduce interest rates by 0.75% this year while at the same time mildly increasing its expectations for inflation and GDP growth this year as recent CPI and PCE data showed some reliance while offering no mention of supercore inflation.

In effect, the Fed has signaled that it will tolerate some variation in the rate and trajectory of inflation, chalking it up as statistical noise. All of this has happened while broader measures of financial conditions have loosened, which further supports continued economic growth.

Exhibit 2: Financial Conditions Index

Since inflation, especially core inflation, tends to lag the business cycle, the Fed’s Pivot indicates to us that they have moved from looking in the rearview mirror to drive monetary policy and influence the economy to finally looking at the road ahead. By following through this shift in policy, we think that the Fed has made the case for an economic soft-landing and avoiding a recession while taming inflation more likely.

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