Powell Maintains 2024 Rate Cut Expectation

Rates decline as Chair Powell testimony begins. Chair Powell’s testimony pushed swap rates lower as he reiterated his expectation for the Fed to cut rates “at some point this year.” The swap curve bull flattened today, with short term rates dropping ~1bp while the long end fell 5-6bps. ADP Employment Change data also contributed to the move lower, as the 140k print was 10k under the forecast, though it marked a 33k increase from January. Meanwhile, equities rallied on the Powell comments, the S&P 500 and NASDAQ both up ~0.60%. In the banking sector, NYCB was able to overcome a near 50% intraday decline to close in the green after announcing a $1B capital injection.

Powell’s cutting outlook stays steady, while Wall Street cheers capital plan comments. Chair Powell testified to Congress today and largely reiterated what he and other Fed officials have been saying for weeks. On the outlook for rate cuts he said, “it will likely be appropriate to begin dialing back policy restraint at some point this year,” but also said that the FOMC still needs more confidence that inflation is sustainably falling to 2%. In his prepared remarks, he conveyed uncertainty around the inflation outlook, saying, “…ongoing progress toward our 2% inflation objective is not assured.” Powell also commented on the bank capital proposal championed by Fed Chair Michael Barr, which in its current form would require banks with over $100 billion in total assets to maintain significantly higher capital levels to account for credit, trading, operational and derivative risks. He said that the plan is in for “broad and material changes,” which was applauded by banking industry groups that are in strong opposition to the proposed changes.

Bank of Canada holds rates steady, states that upside inflation risks remain. The Bank of Canada held rates at 5% today, their fifth consecutive pause since their last hike in July 2023. Policy members remain patient with the rate cut timeline, as Governor Tiff Macklem stated that the decision “reflects governing council’s assessment that a policy rate of 5% remains appropriate.” He added that while disinflationary progress has been strong, the uncertain inflation outlook remains a concern, and that it is “too early to consider” monetary easing. The relatively hawkish conference trimmed bets for rate cuts to commence in June, while futures markets continue to price in a full rate cut by July.