Jerome Powell punctures Wall Street’s hope: “Don’t expect cuts until there is more confidence”

Jerome Powell president of the Federal Reserve of the United States, noted this Wednesday that, given current conditions, it is likely that some rate cuts throughout this yearbut “it’s too early to say whether the recent readings represent more than just a blip,” thus puncturing some hopes that still lingered on Wall Street.

However, although the most recent economic data has been stronger, Powell emphasized that they have not significantly changed the overall view of the situation. Furthermore, he highlighted that the task of reducing inflation has not yet been completed and that the current restrictive monetary policy is putting pressure on the economy. These statements confirm the Fed’s caution andu gradual approach to any adjustment in interest ratesprioritizing economic stability and inflation control.

However, the head of the American center highlighted who still sees room for the Fed to cut rates this year. He noted that stronger-than-anticipated economic activity has not materially changed the Federal Reserve’s expectation that declining inflation will allow interest rate cuts this year.

Powell sees signs that labor market conditions are less tight than in recent years, easing some concerns that wages and prices could rise simultaneously.

“As for inflation, it is too early to say whether the recent readings represent more than just a blip. We do not expect it to be appropriate to reduce our policy rate until we have greater confidence that inflation is falling sustainably towards 2%“he concluded.

The market expectation

In January, markets were pricing in three interest rate cuts in 2024. Broad expectations at the time were for about six interest rate cuts this year.

Since then, expectations have subsided, proving that the market’s bets were right. With now only 2 rate cuts expected in 2024 announced by Powell, the prediction markets are right again.

Fresh data on inflation was released last Friday with the publication of the Personal Expenditure Index (PCE), which revealed that the central PCE increased 0.3% in February, after having risen 0.5% in the previous month, marking its largest consecutive increase in a year. The measure is 2.8% higher compared to the previous year, still above the 2% target established by the Federal Reserve (Fed).

After the report was published, Powell expressed that the data was “online” with the Fed’s expectations, although he acknowledged that the most recent price readings have not been as encouraging as the rapid disinflation seen the previous year.

This leads us to think that the debate within the US Central Bank is at a crucial stage. Despite continued strength in the economy and persistent services inflation, there is a trend against the Fed cutting short-term rates. Traders are delaying their bets on when the first cut could occur.

A lot will depend on how the data develops, especially regarding inflation, going forward. If prices resume their downward trend in the coming months, rate cut expectations would ignite. If this does not happen, We will begin to hear a lot about the possibility of “not landing”.

The Fed president’s words this Wednesday come just a few days after his last intervention, last Friday at a Fed event in San Francisco, and two weeks after the March FOMC meeting and its corresponding press conference.

Last week, Powell reiterated that he is in no rush to start cutting rates. Although Fed officials have outlined three cuts by 2024, disappointing inflation readings earlier in the year have made many economic policymakers more cautious.