Federal Reserve Chairman Jerome Powell speaks at a House Financial Services Committee hearing on the Federal Reserve’s Semiannual Monetary Policy Report on March 6, 2024, at the U.S. Capitol in Washington, U.S.
Bonnie Cash | Reuters
If there was any doubt before, Federal Reserve Chairman Jerome Powell has all but confirmed that there will be no interest rate cuts anytime soon.
Wall Street is now wondering whether the central bank will cut interest rates this year.
That’s because Chairman Powell said Tuesday that he sees “no further progress” in bringing inflation back to the Fed’s 2% goal, and that “we don’t expect to see much progress” in getting enough confidence to begin easing policy. This means that it is likely to take longer than expected.
“They’re getting the economy right where they want it to be. They’re only focused on the inflation numbers right now. The question is, what are the hurdles here?” said Mark, chief economist at Moody’s Analytics. Zandi said. “My sense is that we would need two months, maybe three consecutive months of inflation to match the 2% target. If that is the norm, the earliest we can achieve it is September. Unthinkable.”
Most statistics put inflation at around 3%, and with no significant movement for months, the Fed is facing an uphill battle in the last mile toward its goal.
Market pricing for rate cuts has been very volatile in recent weeks as Wall Street has followed fluctuations in the Fed’s rhetoric. As of Wednesday afternoon, traders were pricing in a roughly 71% probability that the central bank would actually wait until September, according to CME Group’s FedWatch indicators, making the implied possibility of a July rate cut lower. The percentage is 44%.
As for a second rate cut, the Fed had been leaning toward a December rate cut, but questions remain about that.
“My base case right now is two cuts, one in September and one in December, but one rate cut in November is easily conceivable,” Zandi said, adding that for Fed officials who insist on lowering rates, said he believes the presidential election could be factored into the equation. Don’t get swayed by politics.
The “real risk” of no interest rate cuts until 2025
Uncertainty spread throughout the city. The market’s odds of no interest rate cuts this year were about 11% as of Wednesday, but the possibility cannot be ignored at this point.
Economists at Bank of America, for example, said there was a “real risk” that the Fed would not cut rates until “at the earliest” March 2025, but they forecast the only rate cut so far in December. He said he intends to maintain it. Year. In early 2024, the market was pricing in at least six quarters of quarter point cuts.
“Policymakers will be wary of starting a rate-cutting cycle in June or even September,” BofA economist Stephen Juneau said in a note to clients. “In a nutshell, this is the reality for a data-dependent Fed. Even if the Fed backs off its emergency rate cuts, given that inflation numbers have been better than expected since the start of the year and economic activity data has been particularly strong, It’s no wonder.”
To be sure, there is still hope that inflation statistics will fall in the coming months, giving central banks more room to ease.
Citigroup, for example, still expects the Fed to start easing in June or July and cut interest rates several times this year. Andrew Hollenhorst, an economist at Citi, said Powell and policymakers “will be pleasantly surprised” by inflation data in the coming months, adding that the Fed expects to see “a year-over-year slowdown in core inflation or a decline in the economic downturn.” “We are prepared to cut interest rates depending on any signs,” he added. It’s in your activity data. ”
Elsewhere, Goldman Sachs has pushed back the expected month of policy easing from June to July, but “the broader disinflation story remains intact,” said Jan Hatzius, the firm’s chief economist. he writes.
danger is approaching
If that’s true, “the moratorium on rate cuts would be lifted and the Fed would move forward,” wrote Krishna Guha, head of global policy and central bank strategy at Evercore ISI. But Guha also pointed out that in Tuesday’s remarks, Powell opened up a wide range of policy possibilities.
“We believe the Fed remains uncomfortably data-point dependent and could very well be vulnerable to a 3->2->1 rate cut if near-term inflation statistics don’t match up,” he said. he added.
The possibility of a stubborn Fed increases the likelihood of policy mistakes. Despite a resilient economy, prolonged increases in interest rates could threaten the stability of the labor market, not to mention areas of the financial sector such as local banks that are susceptible to duration risk in bond portfolios.
Zandi said the Fed should have already cut rates with inflation so far from its mid-2022 highs that housing-related factors are essentially the only thing standing between the Fed and its 2% inflation target. He added that it was a thing.
Zandi said the Fed’s policy mistakes are “the most significant risk to the economy right now. The Fed has already met its full employment mandate. It’s also pretty much met its inflation mandate.”
He added: “Stuff happens. I think we need to be humble about the financial system here.” “They’re running the risk of breaking something. And for what purpose? If I were a member of the committee, I’d be pushing for action already.”
