Fed Chair Powell has an uncanny ability to balance FOMC’s statement output with his press conference messaging. In the 19th March FOMC meeting, while the FOMC DOTS were decidedly hawkish in terms of median dots distribution, his press conference messaging was clearly dovish. By using his balancing skills, he has ensured that the Fed event was a non-event for volatility. Both equities & bonds liked what he said and had a decent risk on rally on that day but then again as the markets realised the dichotomy of it, both US equities and bonds gave up their gains. Like all of us, Fed has no clue on how Trump’s policies are going to shape up even 3 months down the line. So, while maintaining a status quo on rates, the DOTS profile has changed significantly. Even though the median still calls for two rate cuts this year, there’s been a huge shift in the forecast dispersion. Against this, Powell’s dovishness mostly related to how he discussed recent and prospective inflation developments, including a reference to the potential transitory nature of tariff-driven inflation. Powell did not express concerns around inflation expectations, even calling the University of Michigan data an “outlier”. The FOMC’s overwhelming message was one of uncertainty about the economic outlook. Amid this uncertainty Fed is currently not pushing against the market pricing of 70 bps of cuts in REMCY25 otherwise more macro imbalances might unfold. We believe that the US economy might see both corporate BS as well as household BS weakening significantly primarily because of lower pricing power of corporates & lower employment opportunities for households. With tariffs leading to higher prices, consumers might reduce their demand leading to corporates absorbing the price hit in their earnings leading to more focus on wage control & employment offers. Corporates also might want to resist from adding further jobs in line of high uncertainty. We believe we are going to soon see very low NFPs to the tune of <75k from March NFP itself. Any reading of 2 or more than 2 months of NFP with readings less than 50k will push the Fed to focus on it’s employment mandate. Hence, we continue to believe in 3 rate cuts of 25 bps each in REMCY25. We believe we are only 2-3 months away from NFP readings which will force the Fed hand to cut thrice by a total of 75 bps in REMCY25.
