Federal Reserve Chair Jerome Powell had a clear message on Wednesday: as “gratifying” as it is that inflation has begun to slow, the central bank is nowhere near to reversing course or declaring victory. “It’s going to take some time” for disinflation to spread through the economy, Powell said in a news conference following the Fed’s latest quarter-point interest rate increase. He said he expects a couple more rate hikes still to go, and,
“given our outlook, I just I don’t see us cutting rates this year.”
Investors ignored him, keeping bets on just one more rate hike ahead and piling further into bets that rates will be lower by year’s end than they are now. It’s not obvious which view will prove right: neither the Fed nor markets have a great predictive record since the central bank’s current round of rate hikes began last March. Markets have repeatedly had to scrap bets for a quick pivot, pushing those expectations out farther as the central bank charged ahead with the most aggressive policy tightening in 40 years. For their part, Fed policymakers each quarter through last year kept ratcheting up their own estimates for how high they’d push interest rates as inflation proved stronger and stickier than anticipated. Not once did they signal rates would get cut this year. “The actual outcome is data dependent, and we won’t have the data to confirm or deny…until we are deeper into the first half of the year,” said Tim Duy, chief U.S. economist at SGH Macro Advisors. And as long as there’s that uncertainty, it is in Powell’s interest to try to keep financial markets from betting too hard on rate cuts that would loosen financial conditions, possibly undermining the Fed’s hard-won progress against inflation. Even simply acknowledging the possibility of a rate cut later in the year could undo some of the Fed’s work, forcing more Fed tightening and making it even harder to avoid a recession. Thus Powell’s repeated assertions about not cutting rates, and indeed needing to take them at least above 5% as policymakers forecast in December. “It is our judgment that we’re not yet in a sufficiently restrictive policy stance, which is why we say that we expect ongoing hikes will be appropriate,” Powell said. NN: Powell will soon make his point.