Powell talks down rate cuts as Fed holds course
US Reserve chief keeps borrowing costs at 23-year high, a move watched closely by Bank of England
THE US Federal Reserve has held interest rates at a 23-year-high in a move likely to temper hopes of imminent cuts at the Bank of England.
Jerome Powell, the Fed chief, warned markets that there will be no interest rates cuts in the near future after policymakers voted to hold borrowing costs in a range of 5.25pc to 5.5pc.
Mr Powell said: “We are not declaring victory at all at this point. We think we have a way to go. The committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2pc.”
Mr Powell’s message knocked 1.5pc off the benchmark S&P 500 stock index in New York, while the techheavy Nasdaq fell 2pc.
The hawkish tone from the chairman of the world’s largest central bank will dampen hopes that the Bank of England could soon start cutting rates. Threadneedle Street policymakers meet today, with no change expected, but some economists had predicted falling borrowing costs as soon as spring.
US inflation has fallen sharply from a peak of 9.1pc in June 2022. However, it unexpectedly rose from 3.1pc to 3.4pc in December. Similarly, UK inflation has fallen from a peak of 11.1pc to 4pc. It also ticked up slightly in December.
Like Mr Powell, Andrew Bailey, the Bank of England Governor, has said policymakers need more evidence of a sustained fall to begin cutting rates and has said investors are getting ahead of themselves in their expectations.
Mr Powell said much of the fall in US inflation so far had come from supply chains “healing” and Fed officials needed to see more evidence of easing pressure elsewhere.
It came as the International Monetary Fund (IMF) warned that the Red Sea crisis could “jeopardise” the world’s progress in bringing down inflation.
If the conflict in the region drags on or spreads, it raises the risk of a surge in oil prices, officials said. The IMF said: “A large and sustained spike in energy costs, stemming for example from shipping disruptions, would imply an adverse supply shock to the global economy and could jeopardise the global disinflation process.”
The US economy has so far proved resilient in the face of borrowing costs rising at the fastest pace since the 1980s.
Contrary to many economists’ predictions of a recession in 2023, it ended the year with growth of 3.3pc in the final quarter. Investors had hoped that falling inflation could lead to interest rates in the US falling as soon as March.
However, Mr Powell said this was not his “base case”, prompting traders to pare back their bets. Despite the hawkish tone, Mr Powell last night said policymakers were expecting to cut interest rates at some point this year.
The Bank of England’s panel of policymakers is expected to vote to hold interest rates at a 16-year-high of 5.25pc today. However, British lenders have cut mortgage rates ahead of the Bank’s decision in anticipation of lower borrowing costs in the months ahead.
Skipton Building Society reduced costs on residential and buy-to-let deals by up to 0.46 percentage points on Tuesday. TSB also cut the rates on its various loans by up to 0.85pc. Andrew Goodwin, chief UK economist at Oxford Economics, said UK borrowers may have to wait some time for further falls.
Mr Goodwin said: “Mortgage rates have possibly fallen as far as they could have and they might rise again over the next few months.”
Investors believe the Bank of England will prove slower at cutting interest rates than the European Central Bank and the Fed. Analysts at PGIM Fixed Income have also warned that potential tax giveaways in the next Budget could force the Bank of England to keep interest rates higher for longer.
As a result, the pound could rally to its highest level in two years against the dollar, Goldman Sachs has predicted. The Wall Street bank forecast sterling will hit $1.30 in the next few months.