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Printed: 29 May 2024 6:12 AM


3 May 2024 - Hedge Clippings | 03 May 2024



Hedge Clippings | 03 May 2024

Jerome Powell's press conference following the US Federal Reserve's FOMC meeting held front and centre attention this week. He started with the good news, saying there's been "considerable progress" towards the FED's dual mandate to promote maximum employment and stable prices - with inflation easing over the past year, and a strong labour market, before quickly pivoting to the bad news - inflation is too high, progress in bringing it down is not assured, and the path forward is uncertain.

As such, inflation is showing a lack of progress towards their 2% target, while economic activity is expanding at a "modest pace" consumer spending is robust, the labour market is tight with unemployment at 3.8%. Hence the bottom line was rates stayed on hold at 5.25 to 5.5%.  Previous expectations for a May rate cut have gone out the window, and while Powell indicated it's a "meeting by meeting" decision making process based on the data, he considered a rate hike is unlikely. Longer for stronger seems to be the market's mantra and expectation, with expectations for just one or possibly two cuts later this year, a far cry from the six cuts that had been penciled in at the start of the year.

For rate cuts to eventuate, Powell said inflation is going to have to move down, not sideways as it is now, or the labour market is going to have to weaken. However the 2% inflation target is the key, not employment or wages. Overall Powell's favourite word in his conference seemed to be "confidence" either lack of it, or needing it before taking action.

Locally next Tuesday sees the RBA take their turn, and like the situation in the US, the Board's view will depend on the data. Household spending slowed further in March, growing just 2.1% vs 4% in February, and retail trade numbers are due next week, and are also expected to be under-whelming. In spite of this, and with the most recent CPI number at 3.8%, and wage rises and tax cuts around the corner, makes a rate cut here equally unlikely with market pundits now pushing rate cuts out until 2025. The RBA's inflation target is higher than the FED's hard 2%, but neither want to admit that their respective targets - while admirable - might be too low for the current environment.

To do so would be to admit defeat, and neither will want to go down that path.

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