Vital Statistics:
Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flat.
Jerome Powell spoke in Chicago yesterday. Here are his prepared remarks. Some of the highlights:
Looking forward, the new Administration is in the process of implementing substantial policy changes in four distinct areas: trade, immigration, fiscal policy, and regulation. Those policies are still evolving, and their effects on the economy remain highly uncertain. As we learn more, we will continue to update our assessment. The level of the tariff increases announced so far is significantly larger than anticipated. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. Both survey- and market-based measures of near-term inflation expectations have moved up significantly, with survey participants pointing to tariffs. Survey measures of longer-term inflation expectations, for the most part, appear to remain well anchored; market-based breakevens continue to run close to 2 percent.
Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem. As we act to meet that obligation, we will balance our maximum-‑employment and price-stability mandates, keeping in mind that, without price stability, we cannot achieve the long periods of strong labor market conditions that benefit all Americans. We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension. If that were to occur, we would consider how far the economy is from each goal, and the potentially different time horizons over which those respective gaps would be anticipated to close.
The Fed Funds futures moved a bit more dovish, with the December futures now seeing 4 rate cuts this year. While a May cut is given a small chance, we have a 2:1 chance of a rate cut in June.
The Fed has said that they are comfortable with the level of unemployment, and any increase would be unwelcome. IMO the body language is that if unemployment starts heading towards 5%, and inflation increases marginally then they will get more aggressive cutting rates.
The neutral rate (r-star) is in the 3% – 3.5% range. So if they need to stimulate the economy, we are probably looking at a Fed Funds rate with a 2 handle. Unemployment is generally more uncomfortable than inflation. Don’t forget that inflation in the 1990s averaged around 2.8%, and I think most people remember that as a pretty comfortable time, economically. There is nothing magic about a 2% inflation target.
Meanwhile, Trump took to social media and chastised Powell for not cutting rates more aggressively. “Powell’s termination cannot come fast enough!” the post read. Trump said Powell “is always TOO LATE AND WRONG” and should be cutting interest rates alongside other central banks.
Treasury Secretary Scott Bessent tried to smooth things over, saying that the Fed’s independence is a “jewel box that has got to be preserved.” Trump, like most politicians, prefers lower rates to higher rates. Powell’s term ends in May of next year, and it will be interesting to see who Trump chooses to replace him.
Homebuilder sentiment improved slightly in March, according to the NAHB Housing Market Index. “Policy uncertainty is having a negative impact on home builders, making it difficult for them to accurately price homes and make critical business decisions,” said NAHB Chief Economist Robert Dietz. “The April HMI data indicates that the tariff cost effect is already taking hold, with the majority of builders reporting cost increases on building materials due to tariffs.”
About 60% of respondents said that their suppliers had either increased prices or announced price increases for their products. The NAHB estimated that this increases costs by 6.3% or $10,900. Not sure about that math though.
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Industrial Production fell 0.3% MOM in March, according to the Federal Reserve. Manufacturing output increased 0.3%. Capacity Utilization decreased from 78% to 77.8%.
