April 2024
This month kicked off with the conclusion of the FOMC meeting. It was widely expected that Chairman Powell would acknowledge that the Fed made a mistake in suggesting that rate cuts were imminent back in December. He didn’t go quite that far but did opine that the committee was “less confident” that inflation would fall to 2% in the near term. But he also cast doubt on the possibility that the next move in interest rates would be a hike, as has been suggested by market watchers.
Based on recent economic data, the economy appears to be coming in for a soft landing. The Conference Board’s consumer confidence index plunged from 110.9 in January to 97.0 in April. Also, the JOLTS job openings measure fell sharply to 8.48 million vacancies, well off the 12 million open and unfilled jobs registered just 13 months ago. The employment report showed that 175,000 new jobs were created in April, below the expectation of 240,000 but not a bad outcome for the economy. Employment has been growing above trend for several months and that’s not sustainable at this stage of the economic cycle. That torrid growth likely contributed to the 4.7% jump in unit labor costs in the first quarter.
The consumer price index for April also gave the bond market a reprieve from the march to higher rates. The index registered a 3.4% gain year-over-year, coming in as expected and dropping from last month’s 3.5%. That’s still well above the 3.0% cycle low touched last summer but bond investors are welcoming the data as a resumption of a trend lower in inflation.
Fed speakers were out in force on the day before the CPI release, with cautionary comments on their ability to quickly push inflation lower in the near term. Cleveland Fed President Loretta Mester said in an interview with the Wall Street Journal that it’s “too early to conclude inflation to reverse.” Chairman Powell, for his part, said the Fed “needs to be patient” in letting restrictive monetary policy reduce inflation.
The possibility of a rate cut this year seems to have emboldened speculators to again price-in an overnight rate cut of a little more than 25 basis points by December. Reacting to that speculation, the 2-year note, at the time of this writing, is yielding 4.75%, 30 basis points below where it closed at the end of April.
Accompanying the FOMC statement was the notice that the Fed intends to reduce the roll-off of their investment portfolio. Currently they allow $60 billion a month of their portfolio to mature without being reinvested. That monthly reinvestment of maturing issues will be reduced to $25 billion per month. As the portfolio has declined from approximately $9 trillion to the current $6.7 trillion, they seem to have concluded that they can slow the pace. We note that the change is a net easing of monetary policy as it means less of newly issued Treasury bonds need to be absorbed by investors. To that end the May 8, 2024 Federal Reserve holding summary showed the first increase in holdings since June 2022. We expect that will be the new trend as reinvestment of maturing Treasury’s throws off more income for the SOMA portfolio.
We’d prefer to see the Federal Reserve return to the invisible hand that adjusts monetary policy from behind the scenes. Their high-profile forecast is causing many to lose confidence in their abilities.
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