LIVE MARKETS-A hawkish Fed pivot?

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A HAWKISH FED PIVOT?

The Federal Reserve adopted a more hawkish tone in comments on Wednesday, according to Bank of America, with policymakers taking a more optimistic view of the labor market and Fed Governor Michelle Bowman not dissenting against the decision to keep rates on hold.

Bank of America economists say that they found three major surprises in the January FOMC statement, supporting their view of “a significant hawkish pivot.”

First, the Fed emphasized the December unemployment decline, noting "the unemployment rate has shown some signs of stabilization." Second, the committee removed language stating it "judges that downside risks to employment rose in recent months." Third, Bowman did not dissent in favor of a rate cut, contrary to the bank’s expectations.

Fed Chair Jerome Powell’s comments on the labor market also echoed the statement's optimism, though he noted some pockets of concern, the economists added.

On the dovish side, Powell said the Fed can loosen policy if inflation declines as expected—suggesting he still views policy as restrictive. Notably, he didn't link stronger productivity growth to a higher neutral rate.

“At any rate, we think the Fed's labor views come March will be dictated by the next two jobs reports,” Bank of America said.

The economists expect two 25-basis-point cuts, coming in June and July, after a new Fed Chair is appointed. But this will depend on the composition of the FOMC. “Powell's decision on whether to stick around as a Governor is a big part of that. We see a rising risk that he will stay,” they said.

(Karen Brettell)

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