For anyone who read the FOMC’s statement and listened to the Federal Reserve’s press conference on January 31 and felt like they were getting mixed signals, you are not alone. The Statement and the press conference with Chairman Powell that followed, could have easily led an investor to two different conclusions. I’ll delve into what I see as the key takeaways from both the Fed statement and the press conference in a moment. But my bottom line takeaway is this: don’t look for any change in the Fed’s strategy at the March meeting, unless the next two Consumer Price Index (CPI) prints and next Employment report are very weak. Instead, and as I’ve been saying for many months, we can expect the Fed to make its first rate cut at the May meeting.

What this week’s Fed Statement means

There were four key things the Fed said in its Statement, and taken together the Fed appeared to be coming in largely in line with expectations:

1.      The Fed removed the tightening bias and they are now completely neutral about the path ahead. This effectively sets the stage for the first rate cut in years.

2.      Another interesting takeaway – which may or may not have been intended – is that the January statement no longer contained a reference to the Fed’s conviction that the U.S. banking system is sound and resilient. This may be the Fed’s quick response to the news that broke on the same day about New York Community Bancorp and Signature Bank. It’s effectively the first sign of regional bank stress since March of last year. It’s hard to know if the absence of this language in this week’s Statement was tied to this development. But it caught my attention as we know bank reserves at all but the largest banks are low and trending lower.

3.      The Fed was also silent about Quantitative Tightening and what the path ahead looks like.

4.      Lastly and most importantly, the Fed raised the bar for a March rate cut. Notably, the Fed said that “the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks… The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

This is a big statement as it effectively means that the Fed feels as though they need more confidence, both more time and more data, to better assess what they might want to do in March.

In summary the Fed Statement taken on its own was slightly hawkish, thanks especially to the last point above, which signaled that the Fed won’t ease quickly. But the comments were in range with expectations and it left the Fed’s options open for March. And then the Fed press conference happened...

Thoughts on the Fed’s January 31 Press Conference

The press conference created quite a bit of market volatility and featured some dovish remarks early on followed by a decidedly hawkish change in tone. On the dove side, Chairman Powell said that the "overnight Fed Funds rate is well into restrictive territory,” which would imply that they believe that as inflation has fallen, their policy has become even more restrictive on a “real” basis, and that the next move is obviously an ease. The Chairman added that the labor market is in a better balance (it’s no longer on a tear) and that growth, in and of itself, is not a problem. Since the Fed’s mandate is inflation and sustained low levels of unemployment, not a growth target, such a conclusion would not be unreasonable.

But at roughly 3:05 p.m. – the doves left the room, and the hawks came flying in in full force. It started when Chairman Powell stated that “they [the Fed] need to see more data…what they need is more time to see that the data stays good.” These statements clearly suggest that the recent PCE prints have been low enough for the Fed to ease. Both the 3 month and 6 month core PCE are below the Fed’s 2% target (at 1.5% and 1.9%, respectively). But the Fed needs more confidence that this trend will continue. My take on what this all means is that while core PCE is in the right path, other measures of inflation still remain too high – core CPI is still over 3%. Median CPI from the Cleveland Fed and the Dallas Fed Trimmed-Mean inflation are also still high. The Fed simply needs more time and more data. It’s not that core PCE needs to be better to start easing, the Fed just wants more time.

And then came the bombshell: Chairman Power added that “based on the meeting today I don’t think it’s likely that the Committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that [start to ease].” In other words, Chairman Powell confirmed in very clear terms that the Fed was taking an even more hawkish approach than its public Statement had indicated, and that it wanted more time to see more incoming data before making a definitive move. The market immediately re-priced to this approach.

Never say never, but the bar to a March move is now high. There are still two CPI prints and an employment print before the Fed March meeting, but at this point they’ll have to come in very weak for the Fed to ease in my view. The Fed’s strategy is working and we’ve almost hit the 2% soft landing the Fed has been aiming for. Chairman Powell, possibly channeling his inner Paul Volker, does not want to take any chances. It’s now all about making sure that he (and the Fed) stick their landing.

My bottom line – don’t look for any easing to happen before the May meeting.