Statements from the January Federal Open Market Committee (FOMC) meeting suggest further evidence of disinflation is required before interest rate cuts can be initiated.
As projected, the Federal Reserve opted to continue its monetary policy pause, holding the effective federal funds rate (EFFR) to its current range between 5.25% and 5.50% for the fourth straight FOMC meeting.
Indeed, the decision came with little surprise as interest rate traders priced in a 93% chance the Fed would maintain the current benchmark rate heading into this week’s meeting, per the CMEGroup’s FedWatch Tool.
Despite strong inflation readings the past six months, Powell took a neutral tone this time around, hinting that more inflation data is necessary before Fed members will be confident in lowering rates. Powell also surprised onlookers by acknowledging the possibility that the past six months of pricing data may not represent a “true signal” that inflation is headed to the Fed’s 2% goal.
“The question really is, that six months of good inflation data, is it sending us a true signal that we are in fact on a sustainable path to 2% inflation,” Powell told reporters.
“It’s a good story, we have six months of good inflation but, and you know this, you can look behind those numbers and see a lot of its been coming from goods inflation, for example, and goods inflation running significantly negative. It’s a reasonable assumption that over time goods inflation will flatten out over time probably approximate zero that would mean the services sector would have to contribute more.”
FOMC Meeting Commentary Lowers Chance of March Rate Cut
Wednesday’s FOMC statement removed some commentary pointing to the effect of “tighter financial and credit conditions” on households.
The statement also added language suggesting rate cuts aren’t likely to come until further evidence of disinflation is verified.
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the statement read.
This is all to say the Fed isn’t as quick to cut rates as Wall Street may hope. Make no mistake, Powell seemed pleased with the current pace of economic progress, particularly last month’s 2.9% core Personal Consumption Expenditures (PCE) reading, as well as last year’s overall economic growth.
Unfortunately, the economy’s resilience only gives the central bank more leeway to hold rates at their current level as a means of ushering prices downwards. Indeed, recession fears have largely evaporated from the market, with unemployment continuing to read under 4%. This has allowed the central bank to delay its three expected rate cuts until further into the year.
“It sounds to me like June, September, December is what they are thinking — three rate cuts this year –provided the economy keeps growing,” David Kelly, chief global strategist for JPMorgan Asset Management, told CNBC.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
