Huileng Tan
Wed, April 17, 2024
US Fed chair Jerome Powell has signaled a delay in expected interest rate cuts.
He said the Fed needs more time to be confident that its fight against inflation is working.
An analyst suggests excess money, a result of pandemic-era policies, may be drained from the economy this year.
US Federal Reserve chair Jerome Powell damped expectations of impending interest rate cuts on Tuesday — a sign that the Fed may have pumped so much money into the economy during the pandemic that the surplus is still making its way through the country.
Speaking on a panel discussion at the Wilson Center in Washington, Powell said while inflation pressure has eased in the last year, it hasn't come down enough in recent months.
"The recent data have clearly not given us greater confidence and instead indicate that is likely to take longer than expected to achieve that confidence," Powell said Tuesday
This means that the Fed isn't confident at this point that inflation is headed to its 2% target level in the longer term.
Strong job growth is contributing to price gains. In particular, the Personal Consumption Expenditures Price Index — a key inflation metric for the Fed — was little changed in March over its 2.8% reading in February, Powell pointed out.
So the Fed can keep interest rates higher for longer to cool price rises — although the central bank also has room to cut should the labor market "unexpectedly weaken," Powell added.
"If higher inflation does persist, we can maintain the current level of restriction for as long as needed," he said.
Higher interest rates make borrowing more expensive for anything from mortgages to credit cards — it encourages people to save rather than spend, which in theory, helps bring down prices. But it takes a while for the effects to be felt, and the risk is that the central bank raises rates to the point where the economy slows down and even tilts into recession as demand contracts.
Conversely, lower interest rates encourage borrowing and spending — thus driving the economy when growth slows, such as during the COVID-19 pandemic when the Fed cut rates massively and pumped money into the system.
Excess money may be drained from the economy this year, an analyst said
Powell's comments on Tuesday were a departure from just a month ago, when Fed officials stuck to their expectations of three rate cuts this year.
They also illustrate the Fed's tricky balance as it tries to steer the US economy into a "soft landing," thus averting a recession.
Jim Reid, a research strategist at Deutsche Bank, wrote in a note on Tuesday that he believes it will be "incredibly difficult" to achieve a soft landing for the US economy because it's moved from the largest jump in the money supply since the World War II to the largest contraction since 1930.
Even though the Fed has tightened the money supply — hiking interest rates 11 times since March 2022 — the scale of the COVID-19 stimulus and money supply is still taking time to work through the system, Reid added in the note published before Powell's comments on the same day.
But Reid thinks the excess money could be drained from the economy later this year, when money supply in the economy normalizes.
"If that's correct, then maybe cutting rates in preparation for that is actually the correct thing to do," said Reid. "However, faced with inflation that is currently accelerating, that would be very, very difficult for the Fed to communicate and be comfortable doing."
Deustche Bank is just pricing in one Fed rate cut, in December 2024.
Demand, supply chain snarls, and fiscal stimulus also contribute to inflation
To be sure, money supply isn't the only thing that contributes to inflation.
As Bill Dudley, a former president of the Federal Reserve of New York, explained in an opinion piece for Bloomberg in February 2023, other factors influencing the US economy include consumer demand and stimulus money, and the Fed keeping rates "too low for too long."
"If rates had been considerably higher, earlier, the economy would have grown more slowly, the labor market wouldn't be as tight and wage and price inflation would be lower," wrote Dudley.
Fed Chair Powell had said inflation was "transitory" amid the COVID-19 pandemic but stopped using the term in 2022 amid persistent price rises.
The Fed will gather on April 30 to May 1 for its next policy meeting.
Fed's Powell: Elevated inflation will likely delay rate cuts this year
CHRISTOPHER RUGABER
Updated Tue, April 16, 2024
Federal Reserve Board Chair Jerome Powell speaks at the Business, Government and Society Forum at Stanford University in Stanford, Calif., April 3, 2024. On Tuesday, April 16, 2024, Powell will appear at the Washington Forum on the Canadian Economy.
(AP Photo/Jeff Chiu)
WASHINGTON (AP) — Federal Reserve Chair Jerome Powell cautioned Tuesday that persistently elevated inflation will likely delay any Fed interest rate cuts until later this year, opening the door to a period of higher-for-longer rates.
“Recent data have clearly not given us greater confidence" that inflation is coming fully under control and "instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said during a panel discussion at the Wilson Center.
“If higher inflation does persist," he said, “we can maintain the current level of (interest rates) for as long as needed.”
The Fed chair's comments suggested that without further evidence that inflation is falling, the central bank may carry out fewer than the three quarter-point reductions its officials had forecast during their most recent meeting in March.
His remarks Tuesday represented a shift for Powell, who on March 7 had told a Senate committee that the Fed was “not far” from gaining the confidence it needed to cut rates. At a news conference on March 20, Powell appeared to downplay that assertion. But his comments Tuesday went further in dimming the likelihood of any rate cuts in the coming months.
“Powell’s comments make it clear the Fed is now looking past June,” when many economists had previously expected rate cuts to begin, Krishna Guha, an analyst at EvercoreISI, said in a research note.
In the past several weeks, government data has shown that inflation remains stubbornly above the Fed's 2% target and that the economy is still growing robustly. Year-over-year inflation rose to 3.5% in March, from 3.2% in February. And a closely watched gauge of “core” prices, which exclude volatile food and energy, rose sharply for a third straight month.
As recently as December, Wall Street traders had priced in as many as six quarter-point rate cuts this year. Now they foresee only two rate cuts, with the first coming in September.
Powell's comments followed a speech earlier Tuesday by Fed Vice Chair Philip Jefferson, who also appeared to raise the prospect that the Fed would not carry out three cuts this year in its benchmark rate. The Fed's rate stands at a 23-year high of 5.3% after 11 rate hikes beginning two years ago.
Jefferson said he expected inflation to continue to slow this year with the Fed’s key rate “held steady at its current level.” But he omitted a reference to the likelihood of future rate cuts that he had included in a speech in February.
Last month, Jefferson had said that should inflation keep slowing, “it will likely be appropriate” for the Fed to cut rates “at some point this year” — language that Powell has also used. Yet neither Powell or Jefferson made any similar reference Tuesday.
Instead, Powell said only that the Fed could reduce rates “should the labor market unexpectedly weaken.”
Fed officials have responded to recent reports that the economy remains strong and inflation is undesirably high by underscoring that they see little urgency to reduce their benchmark rate anytime soon.
On Monday, the government reported that retail sales jumped last month, the latest sign that robust job growth and higher stock prices and home values are fueling solid household spending. Vigorous consumer spending can keep inflation elevated because it can lead some businesses to charge more, knowing that many people are able to pay higher prices.
WASHINGTON (AP) — Federal Reserve Chair Jerome Powell cautioned Tuesday that persistently elevated inflation will likely delay any Fed interest rate cuts until later this year, opening the door to a period of higher-for-longer rates.
“Recent data have clearly not given us greater confidence" that inflation is coming fully under control and "instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell said during a panel discussion at the Wilson Center.
“If higher inflation does persist," he said, “we can maintain the current level of (interest rates) for as long as needed.”
The Fed chair's comments suggested that without further evidence that inflation is falling, the central bank may carry out fewer than the three quarter-point reductions its officials had forecast during their most recent meeting in March.
His remarks Tuesday represented a shift for Powell, who on March 7 had told a Senate committee that the Fed was “not far” from gaining the confidence it needed to cut rates. At a news conference on March 20, Powell appeared to downplay that assertion. But his comments Tuesday went further in dimming the likelihood of any rate cuts in the coming months.
“Powell’s comments make it clear the Fed is now looking past June,” when many economists had previously expected rate cuts to begin, Krishna Guha, an analyst at EvercoreISI, said in a research note.
In the past several weeks, government data has shown that inflation remains stubbornly above the Fed's 2% target and that the economy is still growing robustly. Year-over-year inflation rose to 3.5% in March, from 3.2% in February. And a closely watched gauge of “core” prices, which exclude volatile food and energy, rose sharply for a third straight month.
As recently as December, Wall Street traders had priced in as many as six quarter-point rate cuts this year. Now they foresee only two rate cuts, with the first coming in September.
Powell's comments followed a speech earlier Tuesday by Fed Vice Chair Philip Jefferson, who also appeared to raise the prospect that the Fed would not carry out three cuts this year in its benchmark rate. The Fed's rate stands at a 23-year high of 5.3% after 11 rate hikes beginning two years ago.
Jefferson said he expected inflation to continue to slow this year with the Fed’s key rate “held steady at its current level.” But he omitted a reference to the likelihood of future rate cuts that he had included in a speech in February.
Last month, Jefferson had said that should inflation keep slowing, “it will likely be appropriate” for the Fed to cut rates “at some point this year” — language that Powell has also used. Yet neither Powell or Jefferson made any similar reference Tuesday.
Instead, Powell said only that the Fed could reduce rates “should the labor market unexpectedly weaken.”
Fed officials have responded to recent reports that the economy remains strong and inflation is undesirably high by underscoring that they see little urgency to reduce their benchmark rate anytime soon.
On Monday, the government reported that retail sales jumped last month, the latest sign that robust job growth and higher stock prices and home values are fueling solid household spending. Vigorous consumer spending can keep inflation elevated because it can lead some businesses to charge more, knowing that many people are able to pay higher prices.
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