Hit enter after type your search item

How Jay Powell and the Fed moved higher for longer

/
/
/
0 Views

For months, Federal Reserve Chairman Jay Powell offered assurances about rate cuts in 2024, arguing that better-than-expected inflation reports were all part of the Fed’s “bumpy” road to its goal.

Over the past week, those guarantees have disappeared.

“The recent data clearly has not given us more confidence, but instead indicates that it will likely take longer than expected to achieve that confidence,” he said on Tuesday while speaking at an event in Washington, DC.

Powell’s message was clear: rates will remain higher for longer than expected.

Federal Reserve Chairman Jerome Powell. (AP Photo/Manuel Balce Ceneta) (ASSOCIATED PRESS)

He wasn’t the only major voice within the Fed to make such a shift last week.

Three other Fed officials also took a more hawkish stance due to better-than-expected inflation numbers in the first quarter.

Among them was Chicago Fed President Austan Goolsbee, one of the Fed’s more dovish members.

Goolsbee, known for his previous view that the Fed was on a “golden path” to reducing inflation without high unemployment, acknowledged Friday that “progress on inflation has stalled” and that it is now ” makes sense to wait’ before lowering interest rates.

Another reversal came from New York Fed President John Williams, who said Thursday that he sees no “urgency” to cut rates and has not ruled out raising rates if inflation rises further.

That warning came just four days after Williams said in a TV interview that rate cuts would “probably” start this year.

The evaporation of the ‘relaxation preference’

The reversal of some of the Fed’s most influential figures has sparked a new debate on Wall Street about how the rest of 2024 could play out.

“The dovish bias that a lot of people expected earlier this year seems to be dissipating quite quickly,” Jerome Schneider, head of short-term portfolio management at Pimco, told Yahoo Finance.

Traders are now betting that the first rate cut won’t happen until September, rather than June or July, and are now pricing in just one or two cuts instead of the six forecast in early 2024.

Read more: What the Fed’s interest rate decision means for bank accounts, CDs, loans and credit cards

But a cut in September could also expose the Fed to criticism that it acted too close to November’s presidential election.

For example, Blake Gwinn, head of US rates strategy at RBC Capital Markets, now expects one cut in December, after lowering his expectations from three to just one in 2024.

He told Yahoo Finance that Powell’s comments this week reinforced a shift already underway among other members of the Fed’s Federal Open Market Committee.

“Some of the other more centrist members, and even some people who tend to be tolerant, you see them kind of moving away from this bump story where they tried to write off the month of January. strength and inflation as idiosyncratic,” Gwinn said.

Mary Daly, president of the Federal Reserve Bank of San Francisco, poses at the bank's headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir.

Mary Daly, chair of the San Francisco Fed. REUTERS/Ann Saphir. (REUTERS/Reuters)

One such voice is San Francisco Fed President Mary Daly, who had predicted three rate cuts in 2024 but said in a speech on April 12 that “in my view there is absolutely no urgency to adjust the policy rate.”

“I need to be completely confident that interest rates will fall to 2%… before we would consider a rate cut,” Daly added.

Another official who lowered expectations about the timing of this week’s rate cuts was Loretta Mester, president of the Cleveland Fed.

She said on Wednesday that inflation has been higher than expected this year and that the central bank does not need to be in a “hurry” to cut interest rates. Mester had previously said she expected to cut rates three times later this year.

These Fed officials’ shift came after another higher-than-expected inflation rate for March.

The consumer price index (CPI) rose 3.5% in March from the previous year, an acceleration from February’s annual price increase of 3.2% and more than economists expected.

The year-on-year change in the so-called core CPI – which excludes volatile food and energy prices – was 3.8%, the same level as in February but a tenth of a percent higher than expected.

The Fed tends to look at its core measure of CPI, which is now almost double the central bank’s inflation target of 2%.

Powell’s pivot

What may have been the final straw for Powell, however, was an early assessment of where the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, might be heading.

This past week he offered a sneak peek at the March issues that will be released this Friday. And he didn’t sound happy.

The year-on-year change in the ‘core’ PCE – which excludes volatile food and energy prices – was 2.8% in February. That was in line with economists’ expectations and lower than the 2.9% in January.

Powell sounded somewhat encouraged by that reading when he spoke on March 29, saying it was “in line with what we want to see” while sticking to the claim that inflation was still on a “bumpy road” in the towards the central bank’s goal of improving the economy. 2%.

But last week, Powell said he expected PCE’s March reading to change little from February. And the three- and six-month readings will be above that level, he said.

Powell cannot comment on the figures next Friday because the Fed is in the blackout period ahead of its next policy meeting on April 30 and May 1.

“It is appropriate to give the restrictive policies more time to work and be guided by the data and the evolving outlook,” he said last Wednesday.

Not everyone on Wall Street is willing to roll back expectations of rate cuts, despite Powell’s apparent about-face.

Citi senior global economist Robert Sockin stands by his call for a cut in June. He acknowledged that recent inflation figures are “much stronger than expected.”

But he said, “We still think there will be enough progress on inflation by the time you get to the June meeting that there will be enough evidence that the Fed is willing to start that easing cycle.”

Dave Mazza, CEO of Roundhill Investments, made it clear to Yahoo Finance that “ultimately it will all depend on where inflation ends up.”

“And right now that picture doesn’t look positive.”

Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.

Read the latest financial and business news from Yahoo Finance

Leave a Comment

Your email address will not be published. Required fields are marked *

This div height required for enabling the sticky sidebar
Ad Clicks : Ad Views :