On the January FOMC, and The Briefest Word on DeepSeek

The FOMC statement took out the reference to progress on inflation, but Powell built it back in with his prepared remarks in the press conference characterizing it as a “language clean-up,” not intended to “send a signal.” He insists that policy is still restrictive, but was evasive when asked whether it still would be with a single further cut. We think policy is already neutral, as evidenced by the generally mandate-consistent posture of the labor market, real growth and market-based PCE inflation. Stocks, having made new all-time highs after a correction in the wake of the hawkish December FOMC, confirm this. The subsequent DeepSeek correction is a separate matter. We are skeptical about the reporting on this purported breakthrough, but with decades of Moore’s Law under our belt, we should expect technology breakthroughs that slash prices and expand the market. The two rate cuts this year forecasted by the “dot plots” remain a decent base case, but we suspect that as the year plays out the Fed’s sense of the neutral rate will rise. It may well play out that we don’t get, or need, both those cuts. We note that the Bank Term Funding Program is about to expire, and it did its post-SVB job so well, Powell didn’t even mention it.