Fed’s Powell Says Interest Rate ‘Likely at Its Peak’ But Don’t Expect Cuts Now
If the economy behaves ‘broadly as expected,’ lowering rates this year ‘will likely be appropriate,’ but uncertainty is still key.
It’s good news, with a touch of uncertain caution, in Federal Reserve Chair Jerome Powell’s delivery of the central bank’s semiannual monetary policy report to Congress on Wednesday.
Starting with the upside for once. “We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said. This is a more explicit embrace of eventual cuts that the Fed began in January.
But he then added that “the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent.”
Why the downer point of view? Because market participants too frequently keep telling themselves that rate cuts are just around the corner.
“Fed Chair Powell continued to throw cold water this morning on rate cut expectations for 2024,” wrote Alex McGrath, chief investment officer for NorthEnd Private Wealth, in an emailed note. “While maintaining that inflation has fallen dramatically, he continues to indicate that the fight against inflation is not done and that the risks of cutting too early are great. The market has seemingly once again ignored this data point as yields are down and stocks are rebounding this morning from the rout that occurred yesterday.”
Even with 10-year Treasury yields down, as of midday Wednesday they’re still above 4% and the 30-day average SOFR is more than 5.3%. Both would need to come down significantly to begin seeing improvements in lending rates, which typically start with one or the other and then add a spread.
“Just watch T-bill rates six months out for your rate cut forecasts instead of the Kabuki theater of Humphrey Hawkins,” Jamie Cox, managing partner for Harris Financial Group, wrote in an emailed note. “The Fed can afford to sit on higher rates until the labor market starts to crack. Maximum employment is the stronger of the two mandates for rate cuts, and there is no there there to force cuts at this point. So, the Fed has a free pass to inflation fight, for now.”