Powell set to keep Fed on higher-for-longer path

Jerome Powell’s remarks in the coming week will be closely parsed by investors for any clues on just how long the Federal Reserve is willing to wait before cutting interest rates.

The last time the US central bank chair spoke, he signalled that policymakers were likely to keep borrowing costs high for longer than previously anticipated, pointing to the lack of further progress on bringing inflation down, and to enduring strength in the labor market.

The latest price data, which showed stubborn underlying inflation, in tandem with expectations for a robust employment report on Friday, aren’t likely to lead the Fed chief to change his tune.

Powell will address reporters after the Fed’s rate decision on Wednesday, when the central bank is widely expected to hold borrowing costs at a more than two decade high. Expectations for rate reductions have been pushed further into 2024, and investors are now betting on two cuts at most by year-end.

Powell’s colleagues on the Federal Open Market Committee see no urgency to lower rates.

Governor Michelle Bowman said she sees “upside risks” to inflation, and Minneapolis Fed President Neel Kashkari floated the possibility of having no rate cuts this year. The Atlanta Fed’s Raphael Bostic, meanwhile, said he could favour hiking them if inflation gets worse.

Swaps traders now see only one Fed rate reduction for all of 2024, well below the roughly six quarter-point cuts they expected at the start of the year. The FOMC, which will update its rate forecasts at the June 11-12 meeting, penciled in three cuts for this year at their March gathering, though the margin was razor thin.