Fed chairman Powell pours cold water on early US interest rate cuts

US Federal Reserve chairman Jerome Powell dismissed hopes of early interest rate cuts, declaring the central bank needed “greater confidence” in the inflation path before it begins easing its restrictive monetary policy.

After the Fed held interest rates at their current target range of between 5.25 per cent and 5.5 per cent, Mr Powell was asked about the prospect of cutting rates in March.

“Based on the meeting today, I will tell you that I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to do that,” he said.

The Fed chairman’s comments sent markets – once optimistic on early rate cuts – sputtering. The Dow had fallen more than 300 points when trading closed on Wednesday. The S&P 500 and Nasdaq Composite closed the day down 1.61 per cent and 2.23 per cent, respectively.

Since the Fed’s December projections forecast three rate cuts this year, markets have been looking for clues as to when this might happen. And despite the Fed’s inflation metric climbing down below 3 per cent, Mr Powell said he and his colleagues need to be more convinced.

The Fed’s first policy meeting of the year comes after the US faced a stronger-than-expected 2023, which Mr Powell characterised as “a surprise”.

US gross domestic product climbed 3.3 per cent in the fourth quarter, beating Fed expectations. Core Personal Expenditures Price Index inflation fell to 2.9 per cent in December and averaged at 2 per cent in the final quarter.

Meanwhile, job gains remained strong while the unemployment rate hovered around the historically low 4 per cent. “The lower inflation readings over the second half of last year are welcome, but we will need to see continuing evidence to build confidence that inflation is moving down sustainably towards our goal,” Mr Powell said.

He added that bank officials had noted the need to see more “good data” that shows inflation is “moving down sustainably” towards its 2 per cent goal. He also said the labour market, which had been one of the Fed’s biggest obstacles, is coming into better balance. “The economy is broadly normalised and so is the labour market, and that process will probably take some time,” Mr Powell said.

Still, his comments reflect the Fed’s uncertain path forward this year as Fed officials will probably continue to be hounded on the timing of rate cuts.

The Federal Open Market Committee’s next meeting is scheduled for March 19-20. Until then, Mr Powell said, “we’re going to be racking the data”.