After last week’s volatility with the FOMC meeting and Powell’s subsequent comments advocating caution on the path of rate cuts as well as a blowout January jobs report, this week gave us a much-needed reprieve. There was not much happening on the data front, so eyes turned to Fed officials who have returned to the speaking stage in droves since their pre-meeting quiet period ended.
On Monday, we also got the Fed’s quarterly Senior Loan Officer Survey which showed credit tightening continuing, albeit at a slower pace. Banks reported they will likely tighten lending standards further on commercial real estate, credit cards, and auto loans as a less favorable economic outlook and deterioration in collateral values give cause for concern. The survey also showed most banks expect loan quality to deteriorate across most loan types. However, the survey showed a smaller share of banks tightening credit in the fourth quarter compared to the prior quarter. Despite the recent wobble in regional bank stocks, the outlook for the sector appears stable enough for the Fed and unlikely to deter them from a cautious approach to easing monetary policy.
Comments from the stream of Fed officials speaking this week echoed a very similar ‘wait and see’ approach to cutting rates. They gave a range of reasons for preferring patience over easing too soon or moving too quickly once they do. “For the moment, policy remains well positioned, as we carefully assess the evolving data and outlook,” Boston Fed President Susan Collins told the Boston Economic Club on Wednesday. "As we gain more confidence … I believe it will likely become appropriate to begin easing policy restraint later this year."
Federal Reserve Bank of Cleveland President Loretta Mester said in a speech on Tuesday that, “The current strength in labor market conditions and the strong spending data give us the opportunity to keep the nominal funds rate at its current level while we gather more evidence that inflation truly is on a sustainable and timely path back to 2%.” Similar sentiment was heard from the many other Fed speakers on the docket this week as they communicate to the market their desire to hold off on cutting rates until they see more data confirming inflation is easing in a sustainable way.
Next week will bring some of that data to light as we get fresh readings of the Consumer Price Index (CPI) and Producer Price Index (PPI) as well as retail sales and housing data, which will all undoubtedly help shape the Fed’s monetary policy decisions in the months ahead. CPI comes out on Tuesday followed by retail sales on Wednesday, and we end the week with a bang as Friday brings housing starts, building permits, PPI, and University of Michigan Sentiment. Have a great weekend!
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