Finance

Fed’s Powell emphasizes need for more evidence that inflation is easing before cutting rates

Published

9 months ago

April 3, 2024

Jerome Powell, chairman of the US Federal Reserve, during a Fed Listens event in Washington, DC, US, on Friday, March 22, 2024. A trio of central bank decisions this week sent a clear message to markets that officials are preparing to loosen monetary policy, reigniting investor appetite for risk.

Bloomberg | Bloomberg | Getty Images

Federal Reserve Chairman Jerome Powell said Wednesday it will take a while for policymakers to evaluate the current state of inflation, keeping the timing of potential interest rate cuts uncertain.

Speaking specifically about stronger-than-expected price pressures to start the year, the central bank leader said he and his fellow officials are in no rush to ease monetary policy.

Watch Fed Chair Powell speak live at Stanford policy conference economic forum

“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Powell said in remarks ahead of a question-and-answer session at Stanford University.

“We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent,” he added. “Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”

The remarks come a week after the rate-setting Federal Open Market Committee again voted to hold benchmark short-term borrowing rates steady. In addition, the committee’s post meeting statement on March 20 included the “greater confidence” qualifier needed before cutting.

‘Bumpy path’

Markets widely expect the FOMC to start easing policy this year, though they have had to recalibrate their outlook for the timing and extent of cuts as inflation has held stubbornly higher. Other economic variables, particularly in the labor market and consumer spending, have held up as well, giving the Fed time to assess the current state of affairs before moving.

The Fed’s preferred inflation measure, the personal consumption expenditures price index, showed a 12-month rate of 2.5% for February, or 2.8% for the pivotal core measure that excludes food and energy. Virtually all other inflation gauges show rates in excess of 3%.

“Recent readings on both job gains and inflation have come in higher than expected,” Powell said. “The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2 percent on a sometimes bumpy path.”

Other Fed officials speaking this week have made remarks consistent with the Fed’s patient approach.

Cleveland Fed President Raphael Bostic told CNBC on Wednesday that he thinks just one cut might be in the offing as prices of some important items have turned higher. San Francisco Fed President Mary Daly said three cuts is a “reasonable baseline” but noted there are no guarantees, while Cleveland’s Loretta Mester also said cuts are likely later this year while adding that rates over the longer term may be higher than anticipated. All three are FOMC voters.

Powell reiterated that decisions are being made “meeting by meeting” and noted only that cuts are “likely to be appropriate … at some point this year.”

The uncertainty about rates has caused some consternation in markets, with stocks falling sharply earlier this week as Treasury yields moved higher. The market stabilized Wednesday, but traders in the fed funds futures market again repriced their rate expectations, casting some doubt on a June cut as the market-implied probability moved to about 54% at one point, according to CME Group data.

Election ahead

Along with his comments on rates, Powell spent some time discussing Fed independence.

With the presidential election campaign heating up, Powell noted the importance of steering clear of political issues.

“Our analysis is free from any personal or political bias, in service to the public,” he said. “We will not always get it right — no one does. But our decisions will always reflect our painstaking assessment of what is best for our economy in the medium and longer term — and nothing else.”

He also talked about “mission creep,” specifically as it relates to some demand for the Fed to get involved in climate change issues and the preparations financial institutions take for related events.

“We are not, nor do we seek to be, climate policymakers,” he said.

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Finance

Fed cuts rate by a quarter point

Published

11 minutes ago

December 18, 2024

Business Finance News

Federal Reserve cuts rates by 25 basis points

WASHINGTON – The Federal Reserve on Wednesday lowered its key interest rate by a quarter percentage point, the third consecutive reduction and one that came with a cautionary tone about additional reductions in coming years.

In a move widely anticipated by markets, the Federal Open Market Committee cut its overnight borrowing rate to a target range of 4.25%-4.5%, back to the level where it was in December 2022 when rates were on the move higher.

Though there was little intrigue over the decision itself, the main question had been over what the Fed would signal about its future intentions as inflation holds steadily above target and economic growth is fairly solid, conditions that don’t normally coincide with policy easing.

Read what changed in the Fed statement.

In delivering the 25 basis point cut, the Fed indicated that it probably would only lower twice more in 2025, according to the closely watched “dot plot” matrix of individual members’ future rate expectations. The two cuts indicated slice in half the committee’s intentions when the plot was last updated in September.

Assuming quarter-point increments, officials indicated two more cuts in 2026 and another in 2027. Over the longer term, the committee sees the “neutral” funds rate at 3%, 0.1 percentage point higher than the September update as the level has drifted gradually higher this year.

“With today’s action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,” Chair Jerome Powell said at his post-meeting news conference. “We can therefore be more cautious as we consider further adjustments to our policy rate.”

Fed Chair Powell calls Wednesday's rate cut a 'closer call' but the 'right call'

“Today was a closer call but we decided it was the right call,” he added.

Stocks sold off following the Fed announcement while Treasury yields jumped. Futures pricing pared back the outlook for cuts in 2025 to one quarter point reduction, according to the CME Group’s FedWatch measure.

“We moved pretty quickly to get to here, and I think going forward obviously we’re moving slower,” Powell said.

For the second consecutive meeting, one FOMC member dissented: Cleveland Fed President Beth Hammack wanted the Fed to maintain the previous rate. Governor Michelle Bowman voted no in November, the first time a governor voted against a rate decision since 2005.

The fed funds rate sets what banks charge each other for overnight lending but also influences a variety of consumer debt such as auto loans, credit cards and mortgages.

The post-meeting statement changed little except for a tweak regarding the “extent and timing” of further rate changes, a slight language change from the November meeting.

Change in economic outlook

The cut came even though the committee jacked up its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than September. However, in the ensuing years the officials expect GDP to slow down to its long-term projection of 1.8%.

Other changes to the Summary of Economic Projections saw the committee lower its expected unemployment rate this year to 4.2% while headline and core inflation according to the Fed’s preferred gauge also were pushed higher to respective estimates of 2.4% and 2.8%, slightly higher than the September estimate and above the Fed’s 2% goal.

The committee’s decision comes with inflation not only holding above the central bank’s target but also while the economy is projected by the Atlanta Fed to grow at a 3.2% rate in the fourth quarter and the unemployment rate has hovered around 4%.

Though those conditions would be most consistent with the Fed hiking or holding rates in place, officials are wary of keeping rates too high and risking an unnecessary slowdown in the economy. Despite macro data to the contrary, a Fed report earlier this month noted that economic growth had only risen “slightly” in recent weeks, with signs of inflation waning and hiring slowing.

Moreover, the Fed will have to deal with the impact of fiscal policy under President-elect Donald Trump, who has indicated plans for tariffs, tax cuts and mass deportations that all could be inflationary and complicate the central bank’s job.

“We need to take our time, not rush and make a very careful assessment, but only when we’ve actually seen what the policies are and how they’ve been implemented,” Powell said of the Trump plans. “We’re just not at that stage.”

Normalizing policy

Powell has indicated that the rate cuts are an effort to recalibrate policy as it does not need to be as restrictive under the current conditions.

“We think the economy is in really good place. We think policy is in a really good place,” he said Wednesday.

With Wednesday’s move, the Fed will have cut benchmark rates by a full percentage point since September, a month during which it took the unusual step of lowering by a half point. The Fed generally likes to move up or down in smaller quarter-point increments as its weighs the impact of its actions.

Despite the aggressive moves lower, markets have taken the opposite tack.

Mortgage rates and Treasury yields both have risen sharply during the period, possibly indicating that markets do not believe the Fed will be able to cut much more. The policy-sensitive 2-year Treasury yield jumped to 4.3%, putting it above the range of the Fed’s rate.

In related action, the Fed adjusted the rate it pays on its overnight repo facility to the bottom end of the fed funds rate. The so-called ON RPP rate is used as a floor for the funds rate, which had been drifting toward the lower end of the target range.

Fed will look for progress on inflation before further cuts

Finance

The Fed’s dot plot shows only two rate cuts in 2025, fewer than previously projected

Published

41 minutes ago

December 18, 2024

Business Finance News

U.S. Federal Reserve Chair Jerome Powell speaks during a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., November 7, 2024.

Annabelle Gordon | Reuters

The Federal Reserve on Wednesday projected only two quarter-point rate cuts in 2025, fewer than previously forecast, according to the central bank’s medium projection for interest rates.

The so-called dot-plot, which indicates individual members’ expectations for rates, showed officials see interest rates falling to 3.9% by the end of 2025, equivalent to a target range of 3.75% to 4%.The Fed had projected four quarter-point cuts, or a full percentage point reduction in 2025, in September.

On Wednesday at the Fed’s last policy meeting of the year, the committee cut its overnight borrowing rate to a target range of 4.25%-4.5%.

A total of 14 out of 19 officials penciled in two quarter-point rate cuts or fewer in 2025. Only five members projected more than two rate cuts next year.

Here are the Fed’s latest targets from 19 FOMC members, both voters and nonvoters:

The projections also will showed slightly higher expectations for inflation. Projections for headline and core inflation according to the Fed’s preferred gauge were hiked to respective estimates of 2.4% and 2.8%, compared to the September estimates of 2.3% and 2.6%.

The committee also pushed up its projection for full-year gross domestic product growth to 2.5%, half a percentage point higher than September. However, in the following years, the officials expect GDP to slow down to its long-term projection of 1.8%.

As for unemployment rate, the Fed lowered its estimate to 4.2% from 4.4% previously.

— CNBC’s Jeff Cox contributed reporting.