Fed’s Powell cements pivot but pushes back on timing of cuts
US Federal Reserve officials cemented the end of their aggressive campaign to push up interest rates, and sought to reset expectations for how soon and how fast they will cut this year as inflation pressures fade.
While policymakers are shifting their focus to when to start easing policy amid a favourable pullback in inflation, it is clear they are in no rush to lower rates. Against a backdrop of a still-solid economy, Chair Jerome Powell said officials would move patiently and doused speculation that rate cuts would start at the next meeting.
“We’re not declaring victory at all,” Powell told reporters on Jan 31 following the Fed’s policy meeting, emphasizing the need to see “more” data confirming a sustained downward trend in inflation. “I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting.”
“It’s a highly consequential decision to start the process of dialling back on restriction and we want to get that right,” Powell said.
Market odds for a rate reduction in March, which had risen above 50% in recent days, dropped to close to one-in-three following Powell’s press conference. The S&P 500 slid by 1.6% on Jan 31, and Treasury yields remained lower.
“The messaging is pushing back against complacently assuming the FOMC [Federal Open Market Committee] will cut in March,” said Derek Tang, an economist with LH Meyer/ Monetary Policy Analytics. “Data dependency is still the calling card.”
The FOMC voted unanimously to leave the benchmark rate unchanged at a 22-year high — as expected — in a target range of 5.25%– 5.5% for a fourth straight meeting.
Officials revamped the post-meeting statement, dropping a reference to a possible additional “firming” of policy and indicating that it would not be appropriate for the Fed to cut rates “until it has gained greater confidence that inflation is moving sustainably toward 2%”.
Powell repeated those words and pushed back against market expectations for five or six rate cuts this year, saying: “We are prepared to maintain the current target range for the federal funds rate for longer, if appropriate.”
“The Fed feels confident it can wait a while longer before initiating a rate cutting cycle,” said Kathy Jones, Charles Schwab’s chief fixed-income strategist. “There is clearly a concern about making a policy mistake.”
Among the central bank’s concerns is an upward revision to inflation figures. The revised figures for the consumer price index — a closely watched price gauge — set to be released in February could reverse some of the recent improvement from late 2023.
The Fed’s preferred gauge of underlying inflation cooled to an almost three-year low in December. Excluding volatile food and energy, the metric was up 1.9% in December on a sixmonth annualised basis, trailing the Fed’s 2% target for a second month.
Powell also made it clear that with the economy holding up well in 2023 and the labour market staying strong, he is no longer expecting that significant weakness — which he had called “pain” in the past — is needed to bring down prices. At the same time, unexpected weakness in the labour market would affect the pace and timing of rate cutting, he said.
“There is a concern that much of the low hanging fruit on disinflation has been plucked,” said Diane Swonk, chief economist at KPMG. “The economy is strong enough to hedge against committing the cardinal sin of central banking, which is to cut and have to reverse course and hike again.”
The central bank reiterated its intention to continue reducing its portfolio of assets by as much as US$95 billion ($127 billion) per month, but Powell said Fed officials plan to start indepth talks about the balance sheet at their March meeting.
The balance sheet discussions “will stretch out for a quite a while,” said Lou Crandall, chief economist at Wrightson ICAP. He sees the Fed making a decision in June to begin tapering in July. —