Fed's Rate Cuts Timeline Still Unclear

U.S. Federal Reserve Chair Jerome Powell reiterated to lawmakers that U.S. Central Bank is in no rush to cut interest rates – at least until policymakers are fully convinced that they have won their battle over inflation.

In his highly awaited speech on Wednesday, March 6th to a House panel, the Fed chief said it will likely be appropriate to begin lower borrowing costs “at some point this year”, but made it clear that they are still not ready to take such measures.

This doesn’t necessarily come as a surprise, as Powell had bluntly stated that there won’t be any rate cuts in March.

The next Federal Reserve meeting is scheduled for March 19-20.

His remarks echoed a consistent message from nearly every Fed official in recent weeks.

The economy and labour market are strong, which means policymakers have plenty of time wait for more evidence that inflation is headed back to their initial goal of 2% before cutting interest rates.

Earlier this year, the Fed had already stressed data’s importance when it comes to setting rate cut pace. As previously reported by BitDelta, a cut is coming, but the timeline is yet to be confirmed.

In Powell’s words: “The committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%”.

Fed officials are now in the last rounds of an aggressive fight against inflation. After raising their benchmark federal funds rate more than five percentage points starting in March 2022 – exactly two years ago – they have held rates steady since July amid easing price pressures.

Central bankers are currently wrestling with how soon and how far they should lower rates.

Cut too early, and officials worry they could stimulate economic activity excessively, potentially leading to inflation exceeding the 2% threshold seen appropriate for a healthy economy…

Conversely, maintaining high borrowing costs for an extended period would pose the risk of pushing the economy into a recession – which goes against the Fed’s goal.

We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said in his prepared remarks, repeating language used at his last press conference on Jan 31st.

“If the economy evolves broadly as expected, it will likely be appropriate to begin dialling back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”

What Does Data Say?

Inflation moderated to a rate of 2.4% over the 12-month period ending in January, a decline from its peak of 7.1% in June 2022.

However, price pressures picked back up from December onwards, and Powell’s favourite indicator – service prices excluding shelter and energy – is still tracking higher than its pre-pandemic trend.

Simultaneously, there has been a robust demand for labour, with employers adding 353,000 jobs in January, and economists predicting an additional 200,000 jobs in February.

Following Powell’s remarks, treasury yields remained mostly lower, and the S&P 500 index futures held gains, while the dollar was lower.

As for gold – which recently hit its all-time high thanks to the Fed – prices have surged to a record high on Thursday led by sluggish U.S. economic data and Powell’s indications of potential rate cuts in the upcoming months.