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Fed’s Powell emphasizes need for more evidence that inflation is easing before cutting rates

On Friday, March 22, 2024, Federal Reserve Chairman Jerome Powell attended the Federal Reserve Listening Event in Washington, DC, the United States. Three central bank decisions this week sent a clear message to markets: Officials are preparing to ease monetary policy, which has reignited investors' risk appetite.

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Federal Reserve Chairman Jerome Powell said on Wednesday that policymakers will need some time to assess current inflation conditions, leaving the timing of potential interest rate cuts uncertain.

Pointing specifically to stronger-than-expected price pressures at the start of the year, the central bank chief said he and his officials were in no rush to ease monetary policy.

Watch Fed Chairman Powell speak live at the Stanford Policy Conference Economic Forum

“In terms of inflation, it's too early to tell whether the recent data are more than just an increase,” Powell said before a question-and-answer session at Stanford University.

“We do not believe it would be appropriate to lower the policy rate until we are more confident that inflation will continue to fall to 2%,” he added. “Given the strength of the economy and inflation progress to date, we have time to allow incoming data to guide our policy decisions.”

Two weeks ago, the rate-setting Federal Open Market Committee voted again to keep its benchmark short-term borrowing rate steady. In addition, the committee's post-meeting statement on March 20 included a reduction in the “greater confidence” qualifier previously required.

“Bumpy road”

The Federal Open Market Committee is widely expected to begin easing policy this year, though they have had to recalibrate their prospects for the timing and magnitude of rate cuts as inflation continues to rise. Other economic variables, particularly those on the labor market and consumer spending, also remained unchanged, giving the Fed time to assess the current state of affairs before taking action.

The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures Price Index, It showed growth for the 12 months in February was 2.5%, with the key core indicator excluding food and energy at 2.8%. Virtually all other inflation measures point to rates above 3%.

“Recent job growth and inflation data have been higher than expected,” Powell said. “However, the recent data do not materially change the overall picture, which remains one of solid growth, a strong but rebalanced labor market, and inflation at a steady pace.” Sometimes down to 2% on rough roads.”

Other Fed officials who spoke this week echoed the Fed's patient approach.

Cleveland Fed President Raphael Bostic told CNBC on Wednesday that he believes an interest rate cut may be coming soon as prices for some key commodities rise. San Francisco Fed President Mary Daly said three rate cuts were a “reasonable baseline” but noted there were no guarantees, while Cleveland Fed President Loretta Mester also said a rate cut could come later this year , while adding that long-term interest rates may be higher than expected. All three are FOMC voters.

Powell reiterated that decisions are made “meeting by meeting” and noted that cuts “may be appropriate … at some point this year.”

Uncertainty about interest rates has caused some panic in the market, with stocks falling sharply earlier this week as U.S. Treasury yields moved higher. Markets stabilized on Wednesday, but traders in the federal funds futures market once again repriced interest rate expectations, casting some doubts about a June rate cut as the market's implied probability once rose to around 54%, according to CME Group data.

early election

In addition to commenting on interest rates, Powell also spent some time discussing the Fed's independence.

As the presidential campaign heats up, Powell noted the importance of steering clear of political issues.

“Our analysis is free from any personal or political bias and is in service to the public,” he said. “We won't always get it right – no one can. But our decisions will always reflect what we think is best for the economy in the medium to long term. A painstaking assessment of what’s favorable—and not the other way around.”

He also talked about “mission creep,” particularly as it relates to some of the requirements for the Fed to engage on climate change issues and financial institutions' preparations for related events.

“We are not, nor do we seek to be, climate policy makers,” he said.

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