The Fed Backpedals the Rate Cut Happy Talk

Just weeks ago, the Federal Reserve sounded more upbeat than it had in a while. While not a slam dunk, progress on reducing inflation and clearing a way for rate cuts was steady. Members of the Fed looked toward three rate cuts in 2024.

Inflation, both in the Consumer Product Index and Personal Consumption Expenditures, has been proving itself more resilient than previously thought, and the jobs numbers have topped expectations. As a result, the Fed is signaling that expectations of immediate rate cuts are perhaps not sound.

Fed Chair Jerome Powell has consistently emphasized that the key to eventual rate cuts would be an ongoing picture “good” economic data showing an approach to a 2% inflation rate. However, “‘recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,’ Powell said at a moderated question-and-answer session in Washington,” according to the Wall Street Journal.

He did say that the central bank wasn’t considering rate hikes but noted that the Fed would leave rates at their current levels “as long as needed” if the agency considered it necessary. If the economy slowed sharply, rate cuts could happen, but to date there are no clear indications that such a deceleration was evident.

Powell isn’t the only one from the Fed making such remarks. In a speech before the International Research Forum on Monetary Policy on Tuesday, Vice Chair Philip Jefferson said, “Real GDP growth in the fourth quarter of 2023 was 3.4 percent, and I expect first-quarter economic growth to slow down but remain solid as indicated by the solid growth in retail sales in March and February. Recent readings on both job gains and inflation have come in higher than expected. The economy added an average of 276,000 nonfarm jobs per month in the three months through March, a faster pace than we have seen since last March. And the inflation data over the past three months were above the low readings in the second half of last year.”

He added that “if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer. I am fully committed to getting inflation back to 2 percent.”

In a CNBC interview, Atlanta Federal Reserve President Raphael Bostic said that inflation would decline “much slower than what many have expected.” He added, “If the economy evolves as I expect, and that’s going to be seeing continued robustness in GDP, unemployment and a slow decline of inflation through the course of the year, I think it would be appropriate for us to do start moving down at the end of this year, the fourth quarter,” he further said.

And Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland in an April 2 speech, said, “I continue to think that the most likely scenario is that inflation will continue on its downward trajectory to 2 percent over time. But I need to see more data to raise my confidence.”