The Road to Achieving Confidence
Months of assurances from Federal Reserve Chair Jay Powell about rate cuts in 2024 were abruptly abandoned last week. Powell openly acknowledged that it is likely to take longer than expected for the Federal Reserve to achieve its desired level of confidence in the economy. This significant shift in stance has sparked widespread debate and speculation about the future of interest rates and the broader implications for the remainder of 2024.
Joining Powell in this unexpected shift were three other significant voices within the Federal Reserve. Chicago Fed president Austan Goolsbee, known for his more dovish stance, conceded that progress on inflation has stalled and advocated for a cautious approach before cutting rates. Similarly, New York Fed president John Williams expressed that there is no urgency to cut rates and even hinted at the possibility of raising them in the face of further inflationary pressures.
The Evaporation of the ‘Easing Bias’
This change in sentiment among influential figures within the Fed has sparked a fresh round of discussions on Wall Street. Some see this as evidence that the earlier anticipated easing bias is quickly dissipating. Traders have adjusted their predictions accordingly, now projecting that the first rate cut will occur in September, rather than the previously anticipated June or July. Furthermore, their outlook has evolved from six rate cuts in 2024 to now expecting just one or two.
Blake Gwinn, Head of US Rates Strategy at RBC Capital Markets, suggests that Powell’s recent comments have solidified a shift in mindset already underway among other members of the Federal Open Market Committee. Dovish members who previously downplayed inflation as a temporary inconvenience are now distancing themselves from that narrative. Meanwhile, San Francisco Fed president Mary Daly emphasizes the need for full confidence in inflation decreasing to 2% before considering a rate cut.
Another notable Fed official adjusting their expectations is Cleveland Fed president Loretta Mester, who stated that there is no need to hastily cut rates due to unexpected inflation levels. Her earlier projection of three rate cuts in 2024 has been revised. This alteration in sentiment from Fed officials directly follows an inflation reading for March that surpassed economist expectations. Notably, the core Consumer Price Index, which excludes volatile food and energy prices and is the focus of the Fed, is now nearly double the central bank’s long-standing 2% inflation target.
Powell’s Perspective and the Path Ahead
Powell’s recent declaration may have been triggered by an early preview of the March figures for the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index. Communicating his dissatisfaction, Powell stated that the March PCE figures are unlikely to significantly differ from February’s readings, with the following months projected to exhibit even higher levels of inflation. Powell’s challenge lies in the Fed’s inability to comment further on the figures until after its upcoming policy meeting at the end of April.
While Powell’s remarks have swayed some, not everyone on Wall Street is ready to completely revise their expectations of incoming rate cuts. Citi senior global economist Robert Sockin maintains his forecast for a rate cut in June, underlining that despite the recent surge in inflation levels, progress in taming inflation will have been made by the time of the meeting. However, not all are as optimistic, with Roundhill Investments CEO Dave Mazza cautioning that inflation remains a crucial factor in the evolving rate decision and is currently painting an unfavorable picture.
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