The Chairman of the Federal Reserve, Jerome Powell, signaled that policymakers will wait longer to cut interest rates longer than originally expected.
The corresponding statement was made by the head of the central bank of the United States at a panel discussion with Governor of the Bank of Canada Tiff Macklem at the Wilson Center in Washington. Jerome Powell noted that lowering the cost of borrowing is becoming a more distant prospect in time because inflation rates in the United States have turned out to be unexpectedly high.
The Fed Chairman also drew attention to the lack of progress in the process of countering the rise in the cost of goods and services. The financial authorities of the United States were able to make some progress in the fight against inflation at the end of last year, but currently, the positive dynamic has weakened. Against this background, the Fed will not be able to begin easing monetary policy shortly. The mentioned decision is not an autonomous expression of will and fully depends on the conditions of the external environment.
Officials at the central bank of the United States will probably need more time to come to a final and sustained confidence that inflation is approaching the 2% target. Until the financial regulator records that the mentioned trend is on the trajectory of guaranteed movement towards the goal, discussion of the issue of lowering the cost of borrowing will not begin.
In March, in the United States, the so-called core consumer price index, which does not include the cost of food and energy, showed an increase of 0.4% compared to February.
Jerome Powell says that if price pressure continues, the Fed will keep rates stable for as long as necessary. At an event in Washington, he noted that the latest inflation data in the United States did not give the financial regulator more confidence and indicated that achieving the target of growth in the cost of goods and services is likely to be a longer process than expected.
Jerome Powell said that against the background of the positive state of affairs in the US labor market and the progress that has been made so far in countering inflation, it is advisable to provide additional time for the implementation of restrictive policies. The head of the central bank of the United States also said that it is necessary to let the data and the changing prospects guide the Fed.
Jerome Powell’s comments are evidence of a change in his previous rhetoric over the past three months. Also, these statements can be interpreted as a signal that officials of the central bank of the United States do not perceive the implementation of the decision on cutting interest rates as an urgent need. This means that any lowering of the cost of borrowing in the US in the current year may occur relatively late. At the same time, it is possible that the Fed will not make an appropriate decision at all in 2024.
Last month, policymakers within the consensus forecast expected that the central bank would implement three interest rate cuts in the current year. At the same time, nowadays investors are betting on no more than two acts of lowering the cost of borrowing in 2024. This point of view is dominant in the futures markets.
The Federal Open Market Committee, a group of officials that sets interest rates, will hold a regular meeting on April 30 – May 1.
Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co., noted that the Fed’s confidence has been shaken.
After Jerome Powell publicly declared his current position on the issue of cutting interest rates, Treasury bond yields in the United States have reached new highs since the beginning of 2024. The corresponding indicator of two-year bonds briefly exceeded the 5% mark for the first time since November 2023, amid a signal from the Fed chair that the financial regulator does not intend to lower the cost of borrowing in an accelerated mode.
At the same time, the economic system of the United States continues to surprise the central bank with its somewhat unexpected stability. In March, local employers added more than 300,000 new jobs. The value of retail purchases, not adjusted for inflation, increased 0.7% last month compared to February and exceeded preliminary expectations. At the same time, the tendency of rising price pressure is being recorded in the United States. Against this background, concerns have arisen about a slowdown in progress towards achieving the financial regulator’s inflation target.
This week, Fed Vice Chairman Philip Jefferson announced the expectation that the process of increasing the cost of goods and services will continue to be moderate while keeping interest rates at the current level. At the same time, he noted that the continued price pressure will be the reason for maintaining a high level of borrowing costs for a long period.
Philip Jefferson did not elaborate on the specific timing of a potential interest rate cut and detail his opinion on the prospects for a corresponding Fed decision, which so far belongs to the category of possible options with an unclear degree of realism of materialization during 2024. At the same time, he noted a high level of uncertainty regarding the lowering of borrowing costs. In his opinion, in conditions of sustained inflation, the most appropriate solution is to maintain the current restrictive policy for a longer period.
Philip Jefferson also expects economic growth in the first quarter of 2024 in the United States to slow down compared to the result for the same period last year, but remain stable.
Richmond Fed President Thomas Barkin says that some recent data on the condition of the US economy, including the consumer price index, do not contribute to the implementation of a soft landing scenario.
State Street’s head of investment strategy in EMEA Altaf Kassam, during a conversation with media representatives, said that the economic system of the United States could be in a difficult situation next year if the Fed does not take action on interest rates shortly. In his opinion, the classical mechanisms of monetary policy are not effective anymore. This means that any Fed decisions will take longer to trickle down into the real economy, which could potentially delay any major shocks. Altaf Kassam says that if interest rates remain at the current level until 2025 when a big wall of refinancing is due, the economic situation will face more things break.
San Francisco Fed President Mary Daly says that there is currently no need for urgent lowering of the cost of borrowing. She explains her position by saying that the economic system of the United States and the local labor market are showing signs of strengthening. Also, in the context of explaining her point of view on the issue of lowering the cost of borrowing, Mary Daly said that inflation is still above the Fed’s target.
At the same time, the president of the European Central Bank, Christine Lagarde, seems to still intend to start cutting interest rates in June. If this decision materializes, the eurozone will become the first of the world’s largest jurisdictions with lower borrowing costs this cycle. At the same time, the mentioned concept of monetary policy contains certain risks. The weakening of the euro may provoke an acceleration of import inflation, which will become a sensitive factor during the period of rising oil prices. Christine Lagarde has repeatedly stated that the ECB does not depend on the Fed’s actions in decision-making. However, this declaration of independence does not negate the fact that the policy of the US financial regulator has a significant impact on the global economy.
