WASHINGTON – The US Federal Reserve’s ongoing fight against inflation could take “longer than expected”, the head of the US central bank said on April 16, further paring back the chances of early rate cuts.
The Fed has been battling rising prices with interest rate hikes since 2022, lifting its key lending rate to a 23-year high as it looks to hit its long-term inflation target of 2 per cent.
But three months of higher inflation data since the start of 2024 have threatened to undermine the expectation of interest rate cuts this year, with one senior Fed policymaker recently suggesting that rates could remain at their current levels until 2025.
“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Fed chairman Jerome Powell said during an event in Washington on April 16 that was streamed online.
“That said, we think policy is well positioned to handle the risks that we face,” he added.
In March, Fed policymakers pencilled in three rate cuts for 2024, leading markets to price in the first of them as early as June.
But hot March consumer inflation data caused many traders to reevaluate and push back their expectations. Futures traders now assign a probability of around 70 per cent that the Fed will cut rates by mid-September, according to CME Group data.
“If higher inflation does persist, we can maintain the current level of restriction for as long as needed,” Mr Powell said on April 16. “At the same time, we have significant space to ease should the labour market unexpectedly weaken.”
He added: “Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work, and let the data and the evolving outlook guide us.”
Investors are now betting on just one to two cuts in 2024, futures markets show.
The Federal Open Market Committee, the group of officials that sets interest rates, next meets from April 30 to May 1.
“Their confidence has been shaken,” said chief economist at Nationwide Mutual Insurance Kathy Bostjancic. “(Mr Powell) confirmed and emphasised what the markets were already pricing in based on the economic data.”
Treasury yields reached fresh year-to-date highs – with the two-year note’s briefly exceeding 5 per cent and reaching the highest level since November – after Mr Powell signalled the Fed is in no hurry to cut rates.
The US economy continues to surprise Fed officials with its resilience. Employers added over 300,000 jobs in March – the most in nearly a year – and retail sales topped expectations. That strength has coincided with a pickup in price pressures in 2024, raising concerns about a stalling in progress towards the central bank’s inflation goal.
Earlier on April 16, Fed vice-chair Philip Jefferson said he expects inflation will continue to moderate with interest rates at their current level but persistent price pressures would warrant holding borrowing costs high for longer.
Richmond Fed President Thomas Barkin said some recent data, including the consumer price index, has not “been supportive” of a soft landing. AFP, BLOOMBERG
