Federal Reserve Chairman Jerome Powell recently hinted that interest rate cuts might be postponed, pointing to persistent inflation pressures as the main reason.
Powell, alongside Bank of Canada Governor Tiff Macklem, cited inflation stagnation for the Fed’s cautious stance at the Wilson Center.
Powell stated, “If price pressures continue, we may need to maintain rates as they are for as long as necessary.”
Recent economic data haven’t boosted confidence, suggesting more time might be necessary before making any rate adjustments confidently.
This shift in the Fed‘s outlook follows several months during which key inflation indicators consistently exceeded analysts’ expectations.
The Fed’s reluctance to cut rates soon suggests potential 2024 cuts could be delayed until later in the year or omitted.
The U.S. economy’s unexpected resilience, demonstrated by strong job additions and March’s retail sales exceeding projections, coincided with inflation pressures.
This combination has raised concerns about a possible stagnation in the Fed’s efforts to reach its inflation targets.
Following Powell’s remarks, the financial markets reacted: bond markets felt pressure, the dollar gained strength, and stocks showed volatility. Treasury yields for 2024 surged, with two-year note yields nearing 5%.
Jeffrey Roach of LPL Financial interpreted Powell’s comments as an indication that the Fed might pause longer than originally planned.
Federal Reserve Officials Diverge on Rate Cut Prospects
Andrew Brenner from NatAlliance Securities described Powell’s stance as hawkish, suggesting that rate cuts could be pushed even further out. “He needs to see the data,” Brenner emphasized.
Fed Vice Chair Philip Jefferson acknowledged significant progress in controlling inflation but stressed that the mission to stabilize it around 2% is still incomplete.
Mary Daly of the San Francisco Fed mirrored the lack of urgency in adjusting rates, citing robust economic performance and inflation.
Investors anticipated six rate cuts in 2024, totaling 1.5 percentage points of easing earlier in the year.
However, the evolving economic landscape has shifted expectations, casting doubt on even a modest half-point reduction.
Wall Street economists now anticipate yields potentially exceeding the 5% threshold, adjusting their outlooks accordingly.
This signals a cautious and watchful approach by the Federal Reserve moving forward.