Federal Reserve Chairman Jerome Powell indicated recent high inflation is making it less likely that interest rates will be cut in the coming weeks and months.
Powell, speaking during a question-and-answer session in Washington, D.C., emphasized that the hotter-than-desired inflation reports over the past quarter have not provided the Fed the confidence it needs that price pressures are abating. Powell’s remarks are an acknowledgement of a recent major shift in expectations from investors regarding interest rates.
“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said.
Inflation, as tracked by the consumer price index, rose to 3.5% for the year ending in March, the Bureau of Labor Statistics reported last week. On a month-to-month basis, inflation rose 0.4%, also more than expected.
“If inflation does persist, we can maintain the current level of restriction as long as needed,” Powell said, adding that the Fed still has space to ease monetary policy if the labor market suddenly starts to weaken.
The Fed chief noted the underlying strength of the country’s labor market — something that has given the Fed more leeway to keep interest rates higher for longer if need be. The economy added 303,000 jobs in March, a number that exceeded expectations.
“We think policy is well positioned to handle the risks that we face,” Powell said on Tuesday. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”
In reaction to Tuesday’s remarks, Quincy Krosby, chief global strategist for LPL Financial, said Powell has entered the “hawkish policy lane.”
“Fed Chair Powell moved more decidedly in a hawkish direction as he essentially underscored that the downward trajectory of inflation has essentially stalled,” Krosby said. “Moreover, he made it clear — rather than his more ambiguous stance regarding a rate easing timetable — that the ‘higher for longer’ narrative remains intact.”
Expectations for rate cuts have rapidly weakened in the minds of investors. Just a few months ago, in December, investors were pricing in some six interest rate cuts in 2024, with most expecting the Fed would have already cut by now.
Now, though, the dynamic has shifted. The odds are that the Fed will not start to cut rates until September, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
There is also nearly 1 in 4 odds that there won’t be a rate cut until sometime after the November elections, up from just 3.4% a month ago.
Earlier this month, Federal Reserve Bank of Minneapolis President Neel Kashkari, one of the voting members of the Federal Open Market Committee, even acknowledged that the Fed might not cut interest rates at all this year if inflation remains sticky.
“In March, I had jotted down two rate cuts this year if inflation continues to fall back towards our 2% target,” Kashkari said. “If we continue to see inflation moving sideways, then that would make me question whether we needed to do those rate cuts at all.”
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Bank of America is now projecting that because of the higher-than-anticipated inflation, there will only be one cut this year, and it won’t come until the very end of 2024.
“We now expect the Fed to start cutting rates in December,” researchers said in a note. “We no longer think policymakers will gain the confidence they need to start cutting in June.”