Steady Fed
The Swiss National Bank became the first among global peers to cut interest rates, while Norway signaled no such move for at half a year.
Coming up, Bank of England officials may split three ways over what to do on borrowing costs, with the probable outcome of no change.
Governor Kazuo Ueda said the Bank of Japan saw the risk of having to raise rates rapidly if it waited too long to end its massive easing program.
Powell, Unswayed
US inflation readings might have disappointed lately, but that hasn't unnerved the Federal Reserve chief.
"We don't want to be dismissive" of the January and February price gains, Chair Jerome Powell said in his press conference after the Fed left interest rates unchanged on Wednesday. But the reports "haven't really changed the overall story — which is that of inflation moving down gradually, on a sometimes-bumpy road, toward 2%," he said.
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said "these comments were at the absolutely minimalist end of the plausible range of reactions by the Fed chair."
The bottom line remains that the Fed is poised to lower interest rates. The median forecast of Fed policymakers, who updated their estimates this week, remains for three cuts in 2024. Futures trading Wednesday showed about a 67% chance of a move in June.
Further, Powell said it will be appropriate to start slowing the Fed's quantitative tightening program "fairly soon." QT, an important complement to rate hikes in the Fed's monetary tightening campaign, is currently removing liquidity from the financial system to the tune of up to $95 billion a month.
Guha interpreted Powell's guidance to mean that an announcement will be coming at the next Fed meeting, in May, for QT tapering to start mid-year.
In a third bit of encouragement for investors, Powell declined to endorse the premise of a question about how he interprets the recent easing in financial conditions. Indexes show conditions have relaxed notably over the past five months, propelled by rallies in stocks and bonds.
"Ultimately we think financial conditions are weighing on economic activity," Powell said. He pointed to high interest rates holding back business investment, and to a decline in employer demand for workers, with job openings trending lower since hitting a peak in 2022.
An important point to keep in mind, according to former New York Fed President Bill Dudley, is that policymakers' current rate setting — at a range of 5.25% to 5.5% the highest since 2001 — will impose more and more restraint on the economy over time.
That's because, as loans and bonds mature, they'll have to be refinanced at rates much higher than before, Dudley, a Bloomberg Opinion contributor, said on Bloomberg TV.
Where the stubborn inflation data prints of late did appear to make an impact was on Fed policymakers' projections for 2025, and the longer run. One of the previous four rate cuts was removed for next year. And the neutral rate was bumped — ever so slightly — to 2.563% from 2.5%.
Derek Tang, an economist with LH Meyer/Monetary Policy Analytics, said those higher projections suggest policymakers "want to guard against financial conditions easing too much upon the first cut" in rates. They're effectively "warning that even when the Fed does start cutting, it may not be fast and furious."
That didn't do much to damp the cheer on Wall Street Wednesday afternoon. The S&P 500 climbed 0.9% to a record high, while Treasuries rallied and the dollar dipped.
Coming up, Bank of England officials may split three ways over what to do on borrowing costs, with the probable outcome of no change.
Governor Kazuo Ueda said the Bank of Japan saw the risk of having to raise rates rapidly if it waited too long to end its massive easing program.
Powell, Unswayed
US inflation readings might have disappointed lately, but that hasn't unnerved the Federal Reserve chief.
"We don't want to be dismissive" of the January and February price gains, Chair Jerome Powell said in his press conference after the Fed left interest rates unchanged on Wednesday. But the reports "haven't really changed the overall story — which is that of inflation moving down gradually, on a sometimes-bumpy road, toward 2%," he said.
Jerome Powell. Photographer: Al Drago/Bloomberg
Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said "these comments were at the absolutely minimalist end of the plausible range of reactions by the Fed chair."
The bottom line remains that the Fed is poised to lower interest rates. The median forecast of Fed policymakers, who updated their estimates this week, remains for three cuts in 2024. Futures trading Wednesday showed about a 67% chance of a move in June.
Further, Powell said it will be appropriate to start slowing the Fed's quantitative tightening program "fairly soon." QT, an important complement to rate hikes in the Fed's monetary tightening campaign, is currently removing liquidity from the financial system to the tune of up to $95 billion a month.
Guha interpreted Powell's guidance to mean that an announcement will be coming at the next Fed meeting, in May, for QT tapering to start mid-year.
In a third bit of encouragement for investors, Powell declined to endorse the premise of a question about how he interprets the recent easing in financial conditions. Indexes show conditions have relaxed notably over the past five months, propelled by rallies in stocks and bonds.
"Ultimately we think financial conditions are weighing on economic activity," Powell said. He pointed to high interest rates holding back business investment, and to a decline in employer demand for workers, with job openings trending lower since hitting a peak in 2022.
An important point to keep in mind, according to former New York Fed President Bill Dudley, is that policymakers' current rate setting — at a range of 5.25% to 5.5% the highest since 2001 — will impose more and more restraint on the economy over time.
That's because, as loans and bonds mature, they'll have to be refinanced at rates much higher than before, Dudley, a Bloomberg Opinion contributor, said on Bloomberg TV.
Where the stubborn inflation data prints of late did appear to make an impact was on Fed policymakers' projections for 2025, and the longer run. One of the previous four rate cuts was removed for next year. And the neutral rate was bumped — ever so slightly — to 2.563% from 2.5%.
Derek Tang, an economist with LH Meyer/Monetary Policy Analytics, said those higher projections suggest policymakers "want to guard against financial conditions easing too much upon the first cut" in rates. They're effectively "warning that even when the Fed does start cutting, it may not be fast and furious."
That didn't do much to damp the cheer on Wall Street Wednesday afternoon. The S&P 500 climbed 0.9% to a record high, while Treasuries rallied and the dollar dipped.
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