Jerome Powell, the chairman of the US Federal Reserve, stated that it would take some time for financial policymakers to evaluate the current status of inflation. This statement made the schedule of potential interest rate cuts uncertain. Powell expanded on stronger-than-expected price pressures in the early part of the year, stating that there is no immediate need to ease monetary policy.
Powell spoke at a question-and-answer session at Stanford University. He said that it is too soon to establish whether the recent inflation readings signified something more than a temporary upswing. He further stated that it would not be appropriate to reduce their policy rate until there is increased confidence that inflation is moving sustainably towards 2%.
This statement was made two weeks after the Federal Open Market Committee decided to hold short-term borrowing rates steady. The committee’s post-meeting report on March 20 included the need for “greater confidence” as a prerequisite for rate cuts.
Markets widely anticipated the Committee to ease policy this year. However, due to persistent higher inflation, they have had to reassess the timing and degree of cuts. Other economic factors, specifically in the labour market and consumer expenditure, have also maintained stability, which gives the Federal Reserve time to evaluate the current state of affairs before taking action.
Other Federal Reserve officials, who spoke this week, also supported the Federal Reserve’s cautious approach. Raphael Bostic, the President of the Atlanta Federal Reserve, told CNBC on Wednesday that he envisages just one cut might be in the offing. On the other hand, San Francisco Federal Reserve President Mary Daly said that three cuts are a “reasonable baseline” but added that there are no guarantees.
The uncertainty about rates has led to some turbulence in the market. This was evident when stocks fell sharply earlier this week while Treasury yields climbed. Powell highlighted that decisions are made “meeting by meeting”. His remarks imply that cuts are “likely to be appropriate … at some point this year.”
In addition to his comments on rates, Powell also spent some time discussing the importance of the Federal Reserve’s independence, particularly in the context of the upcoming presidential election. Powell emphasized the importance of rendering their analysis free from any personal or political bias.
He also mentioned the “mission creep”, specifically in relation to some demand for the Federal Reserve to involve itself in climate change issues and the preparations financial institutions make for related events. He said, “We are not, nor do we seek to be, climate policymakers.”
Federal Reserve Chairman Jerome Powell has stated that it will take some time to evaluate the current state of inflation in the US, leaving the timing of potential interest rate cuts uncertain. Despite stronger-than-expected price pressures at the start of the year, the central bank leader stated that officials are not in a rush to ease monetary policy. Powell stressed that it was too soon to say whether recent inflation readings represented more than a temporary increase. He remarked that it would not be appropriate to lower the policy rate until there was confidence that inflation was sustainably moving down towards 2%.
These comments came two weeks after the Federal Open Market Committee once again voted to hold short-term borrowing rates steady. The committee had released a statement after the March 20 meeting that expressed the need for “greater confidence” before any cuts in interest rates were considered.
Markets have factored in the expectation that the Federal Open Market Committee will start easing policies this year, but have had to adjust their outlook as inflation has been persistently higher. Despite this, economic indicators particularly in the labor market and consumer spending, have been resilient, providing the Fed with time to assess the current situation before making any moves.
The Fed’s preferred inflation measure – the personal consumption expenditures price index – showed a 12-month rate of 2.5% for February, or 2.8% for the pivotal core measure that excludes food and energy. Almost all other measures of inflation are showing rates exceeding 3%.
This week, other Fed officials have made statements that align with the patient approach of the Fed. Atlanta Fed President Raphael Bostic expressed his belief that only one cut might be needed as prices of some key items have risen. Conversely, San Francisco Fed President Mary Daly, Cleveland’s Loretta Mester, and Chairman Powell have suggested that cuts are likely sometime in 2024, although not guaranteed.
There has been some market unease about the uncertainty surrounding interest rates resulting in a halt in stock trading and a reevaluation of rate expectations.
Alongside rates, Powell discussed the issue of Fed independence, particularly in the context of the upcoming presidential election. Powell stressed that it’s essential to steer clear of political issues and maintain an analysis that is free from any personal or political bias. He firmly stated that “We are not, nor do we seek to be, climate policymakers”.
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