Federal Reserve Chairman Jerome Powell, still at the level of hypothetical assumptions, does not deny the likelihood that at some point during the current year, a decision will be made on cutting interest rates, but at the same time recognizes the fact that the circumstances of the external environment are not absolutely favorable for lowering the cost of borrowing and contribute the dynamic of declining the degree of confidence of officials in the prospects of successful movement in direction of a revision of the monetary policy strategy towards easing.
On Wednesday, May 1, Mr. Powell in Washington, during a speech to reporters after a regular meeting of the United States financial regulator, said that a sharp increase in the inflationary process had significantly weakened the positive attitude towards expectations regarding potential changes in price pressure. This means that the mentioned factor of impact on the US economic system continues to be significant and shows no signs of an imminent decrease in its strength.
At the same time, during the specified speech in Washington, Jerome Powell said that it is likely that this year the price growth process will at some point be on a slowdown trajectory. Also, the head of the central bank of the United States demonstrates caution in the context of the approach to forecasting the dynamic of the economy of the country. He did not specify and did not detail his point of view on exactly in which period of 2024 the state of affairs will be formed, which is the most favorable for the financial regulator to decide on cutting interest rates.
The comments of the Fed chairman are, in a sense, iconic. These statements by Jerome Powell symbolize a change in the perception of the current economic tendencies by the financial regulator. At the same time, the mentioned changes are not cardinal or fundamental. In this case, it is implied that the Fed, at the level of preliminary planning of its actions, is inclined to keep interest rates at the current level for a longer time. The present cost of borrowing corresponds to the indicator of a two-decade high. For the first time in an official format, changes in how the financial regulator perceives the current economic situation and assesses its likely subsequent dynamic were declared last month.
The kind of shift in forecasting and expectations that the central bank of the United States is currently demonstrating is the result of the fact that inflation in the country has increased in recent months, demonstrating significant stability on the appropriate trajectory. The sentiment of Fed officials was also affected by the indicators of hiring and consumer spending. Moreover, amid increased inflation, investors’ expectations regarding possible changes in the monetary policy of the United States this year have changed. Currently, they assume that in 2024, the Fed will only once to lower the cost of borrowing. Before the steady increase in inflation was recorded, investors expected that the central bank of the United States would cut interest rates about six times in the current year.
Jerome Powell, in response to a question from journalists about when he and his colleagues will have confidence in the expediency of deciding on lowering the cost of borrowing, said that at present there is no understanding of how long it will take. Also in this context, Mr. Powell noted that the financial regulator will immediately begin cutting interest rates when the economic environment is favorable for changes in monetary policy, implying a softening of this strategy of the central bank of the United States.
Fed officials left the cost of borrowing unchanged. Currently, this indicator is in the range of 5.25%-5.5%. Interest rates in the United States have not changed since July last year. In March, Jerome Powell said that at some point this year it would probably be advisable to start lowering the cost of borrowing. On Wednesday, he showed much less confidence in this matter. At the same time, Jerome Powell still does not rule out the possibility that the Fed will decide to ease monetary policy this year, although the attitude in the appropriate direction is weakening.
It is also worth noting that the head of the central bank of the United States stated that it is unlikely that the cost of borrowing will increase in 2024. According to him, this step in the context of the current economic reality does not belong to the category of actions, the implementation of which is something like an objective necessity or explicit expediency. Jerome Powell said that to make such a decision, Fed officials will need to record convincing evidence that the present version of monetary policy is not sufficiently restrictive in terms of its potential as a set of measures aimed at achieving the 2% inflation target. Without compliance with this condition, the issue of further increases in the cost of borrowing will not be considered.
Seth Carpenter, chief global economist at Morgan Stanley, commenting on Jerome Powell’s statements during a conversation with reporters, said a clear commitment to easing monetary policy. According to the expert, a discussion began on the market regarding the expediency of raising interest rates, but the Fed chairman actually refuted these assumptions. Mr. Powell’s comments were evidence that the relevant issue is currently out of the spotlight of officials of the central bank of the United States.
The Fed chairman’s statements also eliminated concerns among investors that he would officially declare a more decisive position on the need not to make a decision on lowering borrowing costs this year or even support further interest rate increases.
Treasury bond yields declined on Wednesday. The stock price showed growth for a short time. The corresponding dynamic was especially noticeable after Jerome Powell’s press conference. Markets have received some kind of reason for calm after the head of the central bank of the United States said that an increase in the cost of borrowing in 2024 is unlikely.
Fed officials also announced plans to slow down the pace of rolling maturing assets off their balance sheet beginning in June. The car on the runoff of funds from the Treasury will decrease from $60 billion to $25 billion per month. At the same time, the limit on mortgage-backed securities will remain at $35 billion.
Jerome Powell said that given that the principal payments on the agency’s securities currently amount to about $15 billion per month, the total monthly outflow of the portfolio will runoff about $40 billion.
During the six weeks that have passed since the previous Fed meeting, officials of the central bank of the United States have repeatedly stated their concern about inflation data. The relevant information was largely ambiguous, periodically signaling either a slowdown or an acceleration of the mentioned process. The financial regulator’s preferred gauge, the personal consumption expenditure index, rose 2.7% year-on-year in March. In January, this indicator increased by 2.5%. Officials recognized the mentioned dynamic. The monetary policy statement released after the meeting of the central bank of the United States notes the lack of further progress toward achieving the inflation target in recent months.
The PCE price index in the US has decreased compared to the high of 2022, which was 7.1%. The inflation figures, which turned out to be higher than the preliminary expectations for the dynamic of the corresponding indicator, provoked questions about whether the last mile in the framework of the Fed’s desire to reduce the growth rate of the cost of goods and services will be the most difficult. Moreover, the objective fact of the growth of the United States economy and the stable situation in the labor market led to a discussion on the extent of the impact of the monetary policy of the US financial regulator. Jerome Powell stated that, in his opinion, the current state of affairs clearly indicates that the policy is restrictive and is weighing on demand.
Officials of the central bank of the United States say that now the risks for inflation and employment targets are better balanced. On Wednesday, Jerome Powell reiterated his commitment to this point of view. Also, in the relevant context, he separately noted that the US financial regulator is ready to decide on lowering the cost of borrowing if a weakening in the labor market is recorded.
It is worth noting that over the past two years, the Fed has been operating as part of a strategy of aggressively raising interest rates. These measures, implemented by the central bank of the United States, were aimed at curbing the very intensive rate of growth in the cost of goods and services.
Kathy Bostjancic, chief economist at Nationwide Mutual Insurance Co., says that Jerome Powell’s main argument at the moment is that inflation will return to a downward trajectory. According to the expert, the relevant point of view, officially declared by the chairman of the Fed, is evidence that he still estimates as probably a decision to cut interest rates in 2024. At the same time, Kathy Bostjancic underlined that there are likely to be fewer than three actions on lowering borrowing costs this year.
Currently, many Fed watchers expect only one interest rate cut. They will not update their forecasts until the June meeting of the central bank of the United States.
Guy LeBas, chief fixed income strategist at Janney Montgomery Scott, says that with very few exceptions, almost all officials currently agree that the data on the dynamic of the inflation in the US in recent months are insufficient to become a kind of platform justifying and explaining actions regarding the introduction of changes to the concept of the implementation of the Fed’s monetary policy. At the same time, according to the expert, they still expect to be able to cut interest rates in 2024.
Regional Fed bank presidents agree with the position of the central financial regulator that, in the context of the current state of affairs in the economic system of the United States, it is not necessary to start implementing a strategy of lowering the cost of borrowing.
In economic discourse, a formulation such as a crisis of trust is sometimes used. Currently, this kind of term describes the situation in China. The local economy has faced a corresponding problem against the background of slowing growth and a prolonged crisis in the real estate sector, which shows no signs of ending soon. The Fed is currently going through what, by analogy with the specified wording, can be described as a crisis of confidence. Officials say, with good reason, that monetary policy easing is impossible without sustained signs that the dynamic of inflation is moving towards the 2% target. At the same time, in their opinion, the growth in the cost of goods and services will likely slow down by the end of 2024. However, so far there are no signals about the imminent materialization of these assumptions, which at the same time does not negate their reality. Against this background of circumstances of economic situation and probable prospects, a kind of crisis of confidence arises. Currently, there is no unequivocal optimism in the Fed’s mood, but there are expectations of this.
As we have reported earlier, Federal Reserve Bank of Atlanta President Expects One Rate Cut in 2024.
