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The Federal Reserve’s rate-setters maintain their outlook for around three quarter-point rate cuts this year, according to Jay Powell, the Fed chair, in an interview aired on Sunday.
And definitely not music to the market ears as in the modern-day playbook for stock index operators; 3 cuts versus 6 cuts is terrible news on multiple levels, none more so than the latest market rally was primarily driven by the prospects of aggressive rate cuts in 2024
Powell mentioned on CBS’s 60 Minutes that “almost all” Federal Open Market Committee members anticipate the US central bank to reduce rates from their current 23-year high of 5.25-5.5 percent at some juncture during 2024.
Back in December, rate-setters, on average, expected to implement 75 basis points of cuts. Powell indicated in an interview on Thursday that while new projections were not due until March 20, no significant developments had prompted substantial changes in forecasts.
He added, “If the economy were to weaken, then we could reduce rates earlier and perhaps faster.” Conversely, “If inflation were to prove more persistent, that could call for us to reduce rates later and perhaps slower.”
Initially, markets were anticipating six cuts starting in March. However, Powell’s recent remarks suggest such an early move was improbable. Still, combined with a robust January jobs report, hopes of an early spring adjustment have moved from improbable to impossible.
Powell’s interview preceded the release of non-farm payrolls figures, which showed the economy adding 353,000 jobs — nearly double what economists had predicted.
Expressing his views before the figures were made public, Powell emphasized the improving “balance” in the US labour market, stating, “The labour market is very, very strong still.”
While Powell acknowledged the strength of the labour market, concerns have been raised by other Fed officials regarding the potential for higher wage growth and service prices, complicating the central bank’s goal of bringing inflation down to their 2 percent target.
Powell’s “base case” suggests that inflation will continue to decline over the first six months of this year, given the unwinding supply chain disruptions and the impact of the Fed’s rate hikes. Powell highlighted the historical anomaly of these rate increases not leading to a sharper economic slowdown.
In summary, Powell emphasized the overall strength of the economy, the robust labour market, and the downward trend in inflation. He reiterated that the Fed is assessing the optimal timing to adjust its policy stance accordingly. Still, there is very little in the tea leaves to suggest the Fed is willing to cut rates beyond preventing to avoid passive tightening through the real-rate channel.
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