Powell Signals Caution Amid High Borrowing Costs and Investor Speculation
In a recent statement, Federal Reserve chair Jerome Powell pushed back against Wall Street’s growing expectations of interest-rate cuts in the first half of 2024. Despite high borrowing costs, which are at a 22-year high, Powell emphasized that the committee will move cautiously while retaining the option to hike rates further if necessary.
Powell’s Remarks: A Cautionary Tone
In his remarks, delivered on Friday at Spelman College in Atlanta, Powell stressed that it would be premature to conclude with confidence that they have achieved a sufficiently restrictive stance or to speculate on when policy might ease. The Fed chair emphasized the committee’s preparedness to tighten policy further if it becomes appropriate.
"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Powell said. "We are prepared to tighten policy further if it becomes appropriate to do so."
Market Expectations and the Fed’s Position
The odds of a quarter-point cut at the Federal Open Market Committee’s (FOMC) March meeting have increased, with markets now fully pricing in a cut in May. Traders see more than a full point of cuts by December 2024. However, the Fed officials’ median forecast, released in September, projects rates at five to 5.25 per cent at the end of next year – just one-quarter point lower than the current level.
"The FOMC is strongly committed to bringing inflation down to two per cent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective," Powell said, noting that policy is now "well into restrictive territory."
Recent Progress and Monetary Policy Guidelines
Powell highlighted recent progress in the economy, pointing out that over the six months ending in October, core inflation, which excludes food and energy, ran at an annual rate of 2.5 per cent, compared to the overall goal for two per cent annual gains.
"Monetary policy is thought to affect economic conditions with a lag, and the full effects of our tightening have likely not yet been felt," Powell said.
Wall Street’s Focus on Near-Term Rate Cuts
The Wall Street focus on possible near-term rate cuts was raised by comments from Fed governor Christopher Waller, an inflation hawk who acknowledged that the central bank would be willing to consider rate cuts if inflation continues to move lower. He cited monetary policy guidelines, including the Taylor Rule developed by Stanford University’s John Taylor, as calling for a lower policy rate as inflation falls.
Powell’s Comments and Market Implications
Powell’s comments leaving open the possibility of more policy tightening repeated his view following the FOMC’s last meeting in November. Two officials – Richmond Fed’s Thomas Barkin and Fed governor Michelle Bowman – also raised the possibility of additional hikes if inflation proves to be stubborn.
The Labour Market: A Strong but Slowing Economy
Powell described the labour market as "very strong," though he noted that with recent slowing, "the economy is returning to a better balance between the demand for and supply of workers."
Implications and Analysis
The Fed’s cautious stance on rate cuts could have significant implications for the market. Despite high borrowing costs, Powell’s emphasis on caution suggests that the central bank remains focused on its inflation target, rather than prioritizing economic growth.
However, with markets already pricing in a cut in May, Powell’s comments may not entirely dismiss the possibility of near-term rate reductions. The Fed’s dual mandate – to promote maximum employment and price stability – means that policymakers must balance competing priorities, which could lead to further volatility in financial markets.
Conclusion
In conclusion, Powell’s pushback against investor speculation on rate cuts underscores the complexity and nuance of monetary policy decisions. As the economy navigates a period of high borrowing costs and slowing growth, the Fed’s cautious stance suggests that policymakers will remain vigilant in their pursuit of price stability and maximum employment.
What Do You Think?
Join the conversation by commenting below. Share your thoughts on Powell’s comments, market expectations, and the implications for interest rates.
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