Federal Reserve Chairman Powell delivered a speech on the “Federal Reserve Semi-Annual Monetary Policy Report” at a hearing of the House Financial Services Committee on Capitol Hill in Washington, USA on March 6, 2024.
Bonnie Cash | Reuters
If there was any doubt before, Fed Chairman Jerome Powell has all but confirmed that there will be no rate cuts in the near term.
Now, Wall Street wants to know whether the central bank will cut interest rates this year.
That’s because Powell said on Tuesday a “lack of further progress” on lowering inflation to the Fed’s 2% target means it “may take longer than expected” to gain enough confidence to begin easing policy.
“They’ve gotten the economy to where they want it to be. They’re just looking at the inflation data now. The question is, what’s the threshold here?” said Mark Zandi, chief economist at Moody’s Analytics. “My sense is they need two, possibly three consecutive months of inflation data to be consistent with the 2% target. If that’s the target, they could achieve that as early as September. I just don’t I think there will be a rate cut before then.
With most data pointing to inflation around 3% and no significant change in months, the Fed finds itself in a tough spot on the last mile of achieving its target.
Market pricing for a rate cut has been highly volatile in recent weeks as Wall Street chases the Fed’s volatile rhetoric. As of Wednesday afternoon, traders were pricing in a roughly 71% chance that the central bank would indeed wait until September, the most likely scenario, with an implied probability of a July rate cut at 44%. CME Group’s Fed Watch Measurement.
As for a second rate cut, the preference is for one in December, but that remains an open question.
“Right now, I have two base cases, one is September and the other is December, but I could easily see a rate cut in November,” Zandi said. He believes the presidential election may affect the Fed. Official decisions.
‘Real risk’ of no production cuts before 2025
Uncertainty has spread across Wall Street. On Wednesday, the market-implied probability of no rate cut this year was about 11%, but this possibility cannot be ignored at the moment.
Bank of America economists, for example, said there is a “real risk” that the Fed will not cut interest rates until March 2025 “at the earliest,” although for now they are still using their December forecast and will only cut rates that year. Market pricing in early 2024 will fall by at least 6 percentage points.
“We don’t think policymakers will be comfortable starting a rate-cutting cycle in June or even September,” Bank of America economist Stephen Juneau said in a client note. “In a nutshell, this is reliance. The Fed’s Reality in Data. With inflation data beating expectations at the start of the year, it’s not surprising that the Fed is delaying a rate cut, especially given the strong activity data.”
To be fair, there is still hope that inflation data will fall lower in the coming months, providing room for the Fed to ease.
Citigroup, for example, still expects the Fed to begin easing in June or July and cut interest rates multiple times this year. Citi economist Andrew Hollenhorst wrote that Powell and his fellow policymakers will be “surprised” by inflation data in the coming months, adding that the Fed is “preparing for a year-over-year slowdown in core inflation.” or any signs of weakness” in the activity data. “
Elsewhere, Goldman Sachs has pushed back the expected month of policy easing from June to July as “the broader deflationary narrative remains intact,” Chief Economist Jan Hatzius wrote.
imminent danger
If this is true, “the pause on rate cuts will be lifted and the Fed will move forward,” wrote Krishna Guha, head of Evercore ISI’s global policy and central bank strategy team. However, Guha also pointed out that Powell raised a wide range of policy possibilities in his speech on Tuesday.
“We think this still leaves the Fed uncomfortably reliant on data points and highly vulnerable to a rate cut from three to two to one if near-term inflation data doesn’t cooperate,” he added.
The possibility of a recalcitrant Fed increases the likelihood of policy errors.Despite the economy’s resilience, higher rates in the longer term could threaten The labor market is stable, not to mention areas of the financial sector such as regional banks that are vulnerable to duration risks in fixed income portfolios.
Zandi said the Fed should have started cutting interest rates as inflation moved away from mid-2022 highs, adding that housing-related factors were essentially the only thing holding back the Fed’s 2% inflation target.
Zandi said the Fed’s policy mistakes “are the most significant risk to the economy right now. They’ve accomplished their mission of full employment. They’ve almost accomplished their mission of controlling inflation.”
“Things happen and I think we need to be humble when it comes to the financial system,” he added. “They risk damaging something. To what end? If I were a member of the committee, I would argue strongly that we should leave.”
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