Fed Not Ready for Interest Rate Cuts
In a pre-congress speech on March 6-7, Federal Reserve Chairman Jerome Powell voiced concerns about the risks posed by inflation and the need to avoid loosening policies too quickly[^1^]. Powell stated that the Fed will carefully evaluate upcoming data, future prospects, and risk balance before considering adjustments to interest rates. The committee will maintain interest rates until they are confident that inflation is sustainably declining towards the 2% target[^1^].
This stance echoes the remarks made after the January 2024 policy meeting[^1^]. During a congressional hearing, Powell mentioned the need to assess certain data before considering a shift and once again expressed the possibility of rate cuts occurring this year[^1^]. The statement had a positive impact on the stock market, with the Dow Jones increasing by over 250 points at midday, while treasury bond yields mostly declined[^1^].
Overall, Powell’s speech did not provide new insight into monetary policy or the Fed’s economic viewpoint. However, his remarks indicate that officials remain concerned about the temporary nature of inflation and will base their decisions on data rather than establishing a predetermined path[^1^]. Powell added, “We believe that interest rates may have reached the peak of this tightening cycle. If the economy develops as forecasted, the Fed might start easing monetary policy at some point this year. However, the economic outlook is still uncertain, and ensuring that inflation declines towards the 2% target is not yet assured”[^1^].
Powell also emphasized that cutting interest rates too quickly could result in a resurgence of inflation, necessitating rate hikes afterward. Conversely, reducing interest rates too late could have negative effects on economic growth[^1^].
The market has been anticipating an easing of Fed policies after 11 rounds of rate hikes from March 2022 to July 2023. However, investors’ expectations have gradually shifted in recent weeks after cautious statements from Fed officials[^1^]. The January 2024 policy meeting further solidified this cautious approach, with the central bank affirming its reluctance to decrease interest rates despite some progress on inflation[^1^].
Currently, many predict that the Fed will begin lowering rates from June 2024, with four rate cuts expected this year (25 basis points each). However, the Fed has projected only three rate reductions[^1^].
Furthermore, Powell noted the actions that the Fed has taken to target the 2% inflation objective without affecting the labor market and the broader economy[^1^].
This article references information from CNBC.