Powell Reiterates Patience

Federal Reserve Chairman Jerome Powell headed to Washington for the first of two days of testimony before Congress. As expected, Powell reiterated a message of patience, suggesting rate cuts would likely be appropriate at some point this year but the Committee is not ready yet. Powell was clear the Fed needs further evidence of disinflation, or at least further confidence in the inflation data that the underlying trend will continue to retreat to the price target of 2%.

In prepared testimony to the House Financial Services Committee, Powell noted, “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%...If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”

Capitulating to the Fed’s pushback against expectations for a near-term rate cut, investors now anticipate the first-round reduction in June (as opposed to March) with three to four cuts by year-end, down from an earlier forecast of six cuts. While now better aligned with the Fed’s December forecast, even this reduced expectation may still be overly optimistic given the uneven nature and recent acceleration in inflation. 

Also this morning, ADP reported that private-sector employment rose by 140k, falling short of the 150k gain expected, albeit up from the 111k rise in January. This morning’s report, meanwhile, reinforces reduced expectations for the all-important jobs report on Friday.

After a stellar above-trend rise in December and January, totaling a combined 686k, February payrolls are expected to rise just 200k. Of course, even at this lower level, the three-month average would still remain elevated near 300k at 295k. 

Also this morning, MBA mortgage applications rose 9.7% in the week ending March 1 following a 5.6% decline the week prior. The 30-year mortgage rate, meanwhile, fell 2bps to 7.02%, a three-week low.

Later this morning, job openings, according to JOLTS – the Job Openings and Turnover Survey – are expected to rise by 8.9M in January.

Later today at 12:00 p.m. ET, San Francisco Fed President Mary Daly will give a keynote address at the 2024 National Interagency Community Reinvestment Conference.

Yesterday, the final print from the S&P Global’s U.S. Services PMI was revised higher from 51.3 to a reading of 52.3, albeit still marking a two-month low. The Composite PMI, meanwhile, was revised up from 51.4 to 52.5 in the final February print, the highest reading since June.

Additionally yesterday, the ISM Services Index fell from 53.4 to a reading of 52.6 in February, surpassing the expected decline to 53.0. While still in expansionary territory (a reading above 50), February’s print of 52.6 marks a two-month low.

In the details of the report, new orders increased from 55.0 to 56.1 in February, a six-month high. On the other hand, employment fell by 2.5 points to 48.5, averaging 49.3 over the past six months, supplier deliveries declined from 52.4 to 48.9, and prices paid decreased from 64.0 to 58.6 in February, a two-month low. Also, backlog of orders dropped 1.1 points to a reading of 50.3, and inventories declined two points to 47.1 in the second month of the year.

Tomorrow, initial jobless claims are expected to tick up from 215k to 217k in the week ending March 2, the trade deficit is expected to widen from $62.2b to $63.5b in January, and consumer credit is expected to rise by $10.0b in January following a $1.6b increase in December.

However, the key release of the week, as mentioned previously, is the February nonfarm payrolls report that will be released on Friday. After a larger-than-expected gain of 353k in January, nonfarm payrolls are expected to slow to just 200k in February, potentially marking a three-month low.

The unemployment rate, meanwhile, is expected to remain at 3.7% for the fourth consecutive month, well below what the Fed designates as the full unemployment range, and perpetuating the notion of tight labor market conditions.

Average hourly earnings are expected to rise 0.2% in January and 4.3% over the past 12 months, down from the 4.5% gain in January. Wages continue to remain elevated, compounding pressures on businesses while offering a welcome offset to elevated prices and higher borrowing costs on the consumer side. 

-Lindsey Piegza, Ph.D., Chief Economist