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Jay Powell moved to cool speculation that the Federal Reserve would begin cutting interest rates as soon as March, saying that was not the “base case” as the central bank considers easing monetary policy this year.
Falling inflation in recent months had fuelled market bets that the Fed could begin cutting rates from their 23-year high at its next meeting this spring. But the Fed chair said the central bank still needed “greater confidence” that inflation was “sustainably” lower.
“I don’t think it’s likely that we’ll reach a level of confidence by the time of the March meeting . . . I don’t think that’s the base case,” Powell said, in comments that prompted traders to slash their bets on a cut this spring and sent stocks sharply lower.
Powell was speaking on Wednesday after Federal Open Market Committee rate-setters agreed unanimously for the fourth straight month to keep the benchmark federal funds rate at between 5.25 per cent and 5.5 per cent.
The US economy and labour market have remained stronger than many economists predicted, defying forecasts that the Fed’s campaign to snuff out rampant inflation with steep rises in interest rates would eventually end in recession and job losses.
That resilience and a steady fall in inflation over recent months have raised hopes that the Fed is close to engineering a so-called soft landing for the world’s biggest economy.
Powell hailed the benign economic backdrop — but insisted that the Fed still needed more evidence that inflation would keep falling. “We’re not declaring victory,” he said.
The US economy had surprised forecasters since the pandemic, Powell added — but the economic outlook remained “uncertain” and bringing inflation back to the central bank’s 2 per cent target was “not assured”.
“We are prepared to maintain the current target range for the federal funds rate for longer if appropriate,” the Fed chair added.
Stocks fell after Powell comments, with the S&P 500 ending the day down 1.6 per cent, its worst day in four months, and the Nasdaq Composite down 2.2 per cent, its worst day in three months. Traders in the futures market reduced bets on a rate cut in March, slashing the odds from 60 per cent before the Fed released its statement to 37 per cent after Powell’s comments.
“Powell made it abundantly clear that the Fed will not cut in March unless there is a scary crack in the labour market,” said Krishna Guha of Evercore ISI. “Strong growth and a strong labour market allow the Fed the luxury of making sure that inflation is properly nailed down.”
While Powell’s comments stressed the central bank’s caution on inflation, a change in the language in the committee’s statement removed a bias towards further rate rises. “The committee judges the risks to achieving its employment and inflation goals are moving into better balance,” it said.
Stephen Stanley, chief US economist at Santander, described the Fed’s statement as a “nice balance between getting rid of the hiking bias but adding that they are not close to easing yet”.
Wednesday’s FOMC decision to hold rates steady was expected by traders, who have been more focused in recent weeks on when the Fed would begin making the 75 basis points worth of cuts its officials had predicted for this year.
The decision comes after data published earlier on Wednesday indicated wage growth was moderating.
Workers received an extra 4.2 per cent in their pay packets over the course of 2023, according to figures from the US Bureau of Labor Statistics, down from 4.4 per cent in the 12 months to September.
The 4.2 per cent figure was higher than the latest readings of inflation in the consumer price index and as measured by personal consumption expenditures, which were 3.4 per cent and 2.9 per cent respectively.
The Employment Cost index also showed salaries were up by 0.9 per cent between September and December, compared with a rise of 1.1 per cent over the previous quarter.
Powell said that the latest readings showed low unemployment was posing less of a threat to the Fed’s 2 per cent inflation goal. “It’s still a good labour market, but it’s getting back into balance,” he said.
“The further slowdown in wage growth evident in the fourth quarter employment cost index illustrates that easing labour market conditions are helping to push inflation down,” said Andrew Hunter, deputy chief US economist at research firm Capital Economics, adding that the latest data were likely to “reassure” Fed officials that they were on course to hit 2 per cent.
