#Fed #Chairman #Powell #interest #rate #cut #March #early
The Fed keeps interest rates at 5 to 5.25%. An interest rate cut is only appropriate if the Fed has ‘more’ confidence that inflation is ‘sustainably moving towards 2%’. March is probably too early for this, Fed President Jerome Powell said. The S&P 500 and – especially – the Nasdaq fell further after this. Long-term US interest rates fell by 12 basis points.
The interest rate decision itself was in fact one non-event. The overall expectation was that the so-called federal funds rate (the main official interest rate) would remain at the same level. That happened, for the fifth time in a row. The decision was taken unanimously.
According to the Fed president, interest rate cuts in March are not obvious
The surprise of this interest rate decision was in the press conference afterwards. For those who had hoped that interest rates could be lowered at the next meeting, on March 20, Powell had bad news. “That is not the most obvious scenario,” he replied to a question from a journalist.
He did not want to say when the time would be right. For future monetary policy, the Fed says it looks at various data, including the labor market, inflation pressure, inflation expectations, international developments and developments in the financial world.
In the explanation of the interest rate decision, Powell painted a positive picture of the American economy. Inflation is clearly on the decline. For this purpose, the Fed looks at the so-called core PCE inflation: inflation without volatile items such as food and energy. This figure fell from 3.2% year-on-year to 2.9% in December. It seems like a small step, but it does bring the 2% goal closer. And it was also better than the 3.0% that had been expected.
Economic growth is also strong and the labor market is robust, Powell emphasized several times. But he did try to temper expectations. We really need more confidence that inflation is really needed to reach the desired 2% sustainably. The Fed will consider at each meeting whether interest rates can be lowered.
Powell: more data needed before interest rates can be lowered
Below are the highlights from the press conference in bullet points:
- Powell expects a rate cut “at some point” this year.
- It is not certain that inflation will fall to 2%, he warns.
- If necessary, the Fed will leave interest rates as high as they are now for longer.
- Powell points out the risk on both sides: cutting rates too quickly and too hard could cause inflation to rise again and the monetary reins to have to be tightened again. Cutting too little and too late can affect employment and economic growth.
- Powell confirms that more confidence is needed that inflation will go to 2%. The Fed will consider at each meeting whether interest rates can be lowered.
- He expects that the Fed will gain that confidence, but emphasizes that this is no guarantee.
- Powell does not yet want to talk about a soft landing. According to him, it is still too early to declare victory.
- The labor market has recovered well from the corona crisis. 2022 was still a disappointing year, but the labor market has recovered in 2023.
- According to Powell, the risk that inflation will remain above 2% for a longer period of time is greater than the risk that inflation will rise again.
- “This is a good economy,” Powell said. Economic growth is solid to strong. The supply chain has been restored. And the labor market is strong. Unemployment has been below 4% for two years: the limit used by the Fed.
- Powell does not think that lowering interest rates in March is the most obvious scenario.
- The Fed president did not answer the question of whether he would seek another term. He wants to focus on his work.
- Powell pointed out several times that the Federal Reserve has a dual mandate: in addition to price stability, that is full employment.
- FYI: the unemployment rate limit is 4%. As you can see, the labor market is still robust. This is the development of unemployment over the past 12 months.
American long-term interest rates, S&P 500 and especially the Nasdaq are declining
Prior to the interest rate decision, the US ten-year interest rate fell by more than 7 basis points to 3.98%, approximately the lowest level in three weeks. The interest rate then dropped further to 3.93%. So a net reduction of 12 basis points.
The S&P 500 was already at a loss earlier in the day, but fell further in the final trading hours, when it became apparent that a first interest rate cut will probably take a little longer. Ultimately, the index ended up 1.6% down. Fifteen minutes before closing, the index was down 1.5%. Here it goes:
The S&P during the Fed press conference. #economy #markets pic.twitter.com/TwMcqW3Gw6
— Mohamed A. El-Erian (@elerianm) January 31, 2024
The tech-heavy Nasdaq, which is even more sensitive to interest rate movements, even fell 2.2%. The Dow Jones index kept the loss limited to 0.8%.
The Fed looks set to cut interest rates in May after all
All in all, it looks like interest rates will once again come to a standstill in March. But it seems to be happening in May. According to the so-called FedWatch tool from CME Group, the chance that interest rates will still be at the current level is currently priced at only 7.9%.
You can watch the press conference below:
