Jerome Powell defends Federal Reserve's cautious approach

Fed chairman says hotter-than-expected inflation data has done little to deter central bank from cutting rates this year

US Federal Reserve keeps interest rates on hold

US Federal Reserve keeps interest rates on hold
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Hotter-than-anticipated US inflation data has done little to push the Federal Reserve off course as it prepares to issue three rate cuts this year, with Chairman Jerome Powell defending the central bank's wait-and-see position.

In its updated summary of economic projections on Wednesday, most officials at the US central bank are still predicting interest rates to climb down to 4.6 per cent by the end of this year, unchanged from their December projections.

At 2.8 per cent, core PCE inflation still remains above the Fed's 2 per cent goal.

Meanwhile, the Labour Department reported last week that headline and core CPI inflation both rose higher than expected.

While the data did little to add to the Fed's confidence on the timing of these rate cuts, it also did not push the Fed to go the other way.

“And I think they haven't really changed the whole story, which is that of inflation moving down practically, sometimes bumpy towards 2 per cent,” Mr Powell told reporters.

He also defended the Fed's approach to cutting interest rates.

In the weeks and months before Wednesday's meetings, he and others at the Fed have suggested they need more confidence before they are to begin dialling back on their restrictive policy.

“I think, very broadly, that suggests that we were right to wait until we're more confident,” Mr Powell said.

He said that, despite the recent setbacks, the Fed will achieve the necessary confidence to cut rates.

“Chair Powell did a great job of staying right in the middle of the fairway in terms of answering any questions,” Art Hogan, chief marketing strategist at B Riley Wealth, told The National.

"So there was no 'gotcha' moment at the press conference."

That confidence was made apparent in the Fed's summary of economic projection, with officials still projecting three rate cuts this year.

“I think that was the pleasant surprise of the meeting,” said Mr Hogan, who warned against using dot plots to indicate where the Fed will end the year.

“There had been some trepidation over the fact that we've seen three modestly hotter inflation reports, such that might push the consensus for the number of rate cuts on the dot plot to two versus the three that were there. And that didn't change.

“So I think that was the biggest piece of news that was revealed today, that there's still a consensus sitting at three cuts for this year."

Markets now have also largely fallen in line with the Fed's owns projections in forecasting three rate cuts this year, according to data from the CME Group.

“At beginning of the year, I would argue that we were a bit exuberant about the Fed cutting rates maybe six or seven times and starting as early as March,” Mr Hogan said.

But Wells Fargo economists still anticipate four rate cuts this year, with the first to come in June.

“With the [Federal Open Market] Committee more upbeat on prospects for economic activity and a bit more worried about inflation, the risks to our outlook are skewed towards the FOMC beginning to ease a little later in the summer (at its July 31 meeting), or potentially proceeding at a slower pace,” they wrote in a note to clients.

Mr Hogan said markets are now in line with the Fed's so-called dot plots, a figure that the central bank releases in its updated projections to forecast where rates will land by the end of the year.

Chair Powell did a great job of staying right in the middle of the fairway
Art Hogan, chief marketing strategist at B Riley Wealth

The dot plot would also probably be closely watched by GCC nations whose currencies are pegged to the dollar and largely follow the Fed's monetary policy decisions.

Whether there is consensus on the total amount of rate cuts for the year remains to be seen.

Ten Fed officials projected three or more rate cuts this year, while nine others pencilled in two or less.

“That's how close the majority is,” Mr Hogan said.

While dissenting votes have become exceptionally rare under Mr Powell's leadership, the Fed chairman said he would respect a dissenting member.

“We're a very consensus-oriented organisation and we do try to achieve consensus, and ideally unanimity,” Mr Powell said.

“You respect thoughtful dissents very much.”

Updated: April 04, 2024, 8:47 AM