The Federal Reserve meeting policy statement released on Wednesday signaled an uncertain timing for rate cuts, but not before the second half of the year. Yet policymakers gave a green light to slowing the pace at which the Fed is shrinking its Treasury holdings, which may modestly work against the rise in market interest rates. The S&P 500 turned modest losses into solid gains as Fed chair Jerome Powell spoke, but gave up all its progress late in the day.
Powell Outlines QT Changes
Powell said he still expects inflation to move back down later this year, though his confidence in the forecast is lower. He highlighted a likely easing of housing inflation as supporting his outlook.
Powell said "it's unlikely" that the next Fed rate move will be higher. "I do think it's clear that policy is restrictive" with interest rates at current levels.
Still, he said it will take longer than expected for the Fed to gain confidence that inflation is back on track to 2%. That essentially rules out a June rate cut.
Restrictive policy clearly needs "longer to do its job," Powell said.
Powell said the change in balance sheet runoff will fall to $40 billion per month starting June 1. He added that the Fed's balance sheet will still ultimately shrink the same amount as previously intended, but it will take longer to get there.
The 10-year Treasury yield fell as Powell spoke, giving the S&P 500 a lift. The reaction may partly reflect the lower borrowing the Treasury will need in coming quarters.
Fed Meeting Statement
The Fed statement reiterated that rate cuts will wait until policymakers have "gained greater confidence that inflation is moving sustainably toward 2%."
However, policymakers announced a slower pace for unloading holdings of Treasuries from the Fed's balance sheet.
"Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion."
Approving relief from quantitative tightening, or QT, may be seen on Wall Street as throwing a bone to markets.
Fed QT Expectations
Minutes from the March 20 Fed meeting indicated that policymakers "generally favored reducing the monthly pace of runoff by roughly half from the recent overall pace." That implies the pace of Treasury holdings running off the balance sheet as they mature could fall by more than half from the current $60 billion cap.
Still, Wall Street had doubts that the Fed would want to provide any reason for markets to rally. Deutsche Bank economists predicted that a slowing of QT "is likely to wait until June, as the FOMC will want to avoid a dovish misinterpretation that could ease financial conditions inadvertently," strategist Jim Reid wrote on Wednesday.
Fed Rate Cut Odds
After of the 2 p.m. Fed policy statement, market pricing show 28% odds that the first rate cut will come by the July 31 meeting, inching up from 20% earlier Wednesday. Markets see 54% odds the first cut will happen by Sept. 18, up from 44% ahead of the Fed statement.
Markets now see 59% odds of no more than a single quarter-point rate cut for the full year. There is a 20% chance that the Fed will leave rates steady.
S&P 500
The S&P 500 turned a slight loss into a 1% advance in Wednesday afternoon stock market action, before giving it all back and closing off 0.4%. On Tuesday, the S&P 500 fell 1.6% in its biggest drop since the Jan. 31 Fed meeting first slowed the path to rate cuts.
The S&P 500 had rallied back near its 50-day moving average on Monday, but is now struggling to regain the key technical level.
The 10-year Treasury yield fell to 4.63% from 4.69% on Tuesday.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
How Hot Is The Labor Market?
On Tuesday, markets appeared to be throwing in the towel on prospects for multiple rate cuts in 2024 after the Fed's primary gauge of wage growth showed acceleration in Q1. After three months of too-hot inflation readings, the last thing Wall Street wanted to see is a renewed pickup in wage growth that could set off a new round of price hikes.
The employment cost index showed that compensation rose 1.2% in the first quarter, after a moderate 0.9% rise in Q4. Economists had expected a second straight 0.9% increase. Still, a closer look at the data suggested less cause for alarm. For one thing, a 1.3% rise in government pay dragged up the headline gain. Private industry compensation rose a more moderate 1.1%.
That's not all. Below the surface, ECI data showed that some concerns about a tight job market fueling wage growth have faded. Compensation actually fell 0.1% for retail workers in Q1 and rose just 0.5% in the leisure and hospitality sector. Pay rose just 0.9% for construction workers. Still, there were a couple of hot areas. Hospitals saw a 1.4% pay hike, while manufacturers raised pay by 1.2%. The latter might be a lagged effect of the United Auto Workers settlement with Detroit automakers last November.
Wednesday's Job Openings and Labor Turnover Survey provided more reason for the Fed to stay calm about the latest wage and inflation data. With the number of openings down 325,000 to 8.488 million in March, there are now 1.3 unemployed workers per opening, down from a peak of 2 per opening through much of 2022.
Economists look at the quits rate as a leading indicator of wage growth. Less employee turnover means employers won't have to compete as hard to keep their workers from seeking greener pastures. In March, the quits rate fell to 2.1%. Excluding the early months of the pandemic, that was a six-year low.
