Chairman Powell is happy with the Federal Reserve's trajectory on rate cuts: Diane Swonk

We begin first with KPMG Chief economist Diane Swonk, who sits on the advisory committee of the Federal Reserve Board and the regional Fed banks. Diane Powell again and again did stress that the Fed will still be data dependent. But you can't ignore, as I said, his tone, how confident he sounded about the pausing policy. 7 pauses. Let's just listen to 1 sound bite that we thought underscored that strength and then you can comment. That's what we've been getting is good progress on inflation with growth at a, at a, a good level and with a strong labor market. Now ultimately we think rates will have to come down to continue to support that. But so far they haven't had to. And you know, that's why we're watching so carefully for signs of weakness. We don't really see that. We kind of see what we wanted to see, which was gradual cooling and demand, gradual rebalancing in the labor market while we're continuing to make progress on inflation. So we're getting we're getting a good results here. I haven't heard him speak that strongly or at least that confidently, have you? I mean, this, this feels like he is happy with the current path. How do you read that, Diane? Oh, I agree. He's very happy with the current path. And that's something we saw sort of he front run the rest of his colleagues back in December. I do think it was a little happier than the rest of them and that showed up in December when everyone sort of front run them in terms of pricing in seven rate cuts for the year. That's not where the Fed is at. He is happy with it and he's happy with the trajectory on rate cuts, which is for one cut this year as well. And I think that's important. He underscored several times that the SCP, although they could have gone back in and changed their forecast and some may have done that, that this is just a forecast. It's, you know, only as good as what the data is, and it's a totality of the data. So he's going to wait it out. He's comfortable waiting it out. He's comfortable standing where they're at. He doesn't want to make that, you know, one extreme error that a central bank can make and that's to prematurely cut rates when inflation is still as high as it is. What we thought was, was really the most, the most anticipated piece of this meeting today was not that there was any right movement because there wasn't again, the 7th pause, but it was the dot plot. And for those of you who don't know what the heck the dot plot is, it's the visual every quarter of exactly where everybody stands and you get the median forecast of all different issues. We're looking right now at the dot plot for rate cuts, and it looks like one rate cut this year, down from three. Last time we got a dot plot, which was in March, but four of the 19 participants here said no cuts this year. I, I would imagine there are some people who are disappointed, especially perhaps, you know, small businesses who like to borrow money to grow. You know, on the, on the no rate cuts, I think those, some of those people might have actually had rate hikes because we know at the May meeting there are people who were thinking about having a rate hike this year. And if I had to guess and was sitting at that meeting after they got the better than expected inflation data, they said, OK, we're OK for now. The economy is solid, we can sit here and hold it out for the rest of the year. But my sense is that's where they're at now. Whether they're stay, they'll stay there or not is going to be dependent on whether or not the data shows any weakening. That is important for small businesses. It is small mid sized businesses are feeling the brunt of this pinch of higher rates along with low income households. And so clearly they're not happy with this. That said, the Fed is willing to move once they see that data, but data are lagged and this is a bias that's inside of what the Fed is doing is although things have gone really well and you heard his confidence there, it was great. They've gone really well so far. The bias is that they wait until the data come to them and if something were to deteriorate rapidly, and that's something he constantly warns about, that they would cut much more aggressively. By the time the data weakens, it will be after the fact. That is a huge concern that a lot of people have. But Diane, do you see convincing evidence that things have cooled down enough to warrant a rate cut between now and let's say, November? I mean, it almost sounded. And if you if you believe that Nick Timorous at the Wall Street Journal is sort of the guy who sees a head for the Fed. I don't want to say Fed whisperer, but it's kind of what it looks like. He effectively said this morning that they're that basically we're going to see them, the Fed take the summer off. Oh, absolutely. And I agree with that with Nick. I mean, I know Nick well and, you know, he talks to all of us and he's great. But I think it's important because the Fed does think that they're not going to be moving anytime soon. They really need to see a dramatic shift in events for them to move soon. And I think that's the message they sent today. I also think, you know the one thing that was surprising that they marked down on their forecast was they marked up their forecast on inflation for year end and that's something we've been looking at for a while now. It doesn't take much to have inflation look like on a year over year basis. It re accelerates by the end of the year. That's very important because we saw such an improvement last year. It makes for easy year on year comparisons, but that's going to make it much harder for the Fed to explain why it's cutting when it does. It's going to have to rely on three month and six month moving averages, annualized rates. It's going to be a bit confusing on the messaging. If the Fed really gets what it's forecasting on inflation to then cut while inflation on an annual basis, a year over year basis looks like it's stuck at where it is essentially today. Well, keep this up everybody. We're looking at the six month mean, OK? And that basically shows that for pretty much through the last year, inflation started to come down. This is the reason folks. This is the visual as to why Jay Powell is hesitant to cut rates because then it began to tick up over the last couple of months. So be very careful, OK? That's what he's thinking, I would imagine. Diane, it is great to have you. Thank you very much.