| PROSPERITY PUB MARKET TALK
The Fed Likes What It Sees, but Not Enough To Cut Rates… Yet
Jerome Powell recently highlighted the Fed’s cautious stance on cutting interest rates, despite seeing more of the kind of economic data that they’d like to see before issuing a rate cut.
While Powell acknowledged the significant progress in taming inflation — falling from 5.6% in mid-2022 to 2.6% — he emphasized that the Fed is waiting for more consistent evidence before making any moves to lower rates.
“We want to have more confidence inflation is moving down” to the Fed’s 2% goal before trimming rates, Powell stated at a forum hosted by the European Central Bank in Portugal.
This echoes the cautious tone Powell has maintained since mid-June, despite inflation measures showing notable softening. For instance, the core inflation reading that excludes volatile food and energy items edged up by just 0.1% in May, bringing the annual increase down to 2.6%, the lowest since March 2021. However, Powell underscored, “That’s one month of 2.6%.”
Adding to the complexity is the state of the job market. While the economy has shown resilience, with a robust 272,000 jobs added in May and an average of 248,000 per month so far this year, Powell highlighted the need for caution. “Because the U.S. economy is strong… we can afford to take our time and get this right,” he said.
The Fed’s decision-making process is a balancing act between curbing inflation and avoiding a recession.
While high-interest rates have helped cool down inflation, they also pose a risk of slowing down economic growth too much. The Fed’s key interest rate, which surged from near zero in March 2022 to a range of 5 to 5.25% by July 2023, is at a 23-year high.
And even though inflation eased significantly in the second half of last year, it picked up again in the first quarter of this year, making Fed officials wary of cutting rates prematurely.
Interestingly, this cautious approach contrasts sharply with market expectations from last year, when many anticipated 4-5 Fed rate cuts in 2024.
Our own Jeffry Turnmire has warned many times about such market expectations, consistently warning that the economic conditions didn’t support multiple rate cuts.
His caution seems to have been right on the money, as the conversation has shifted to possibly just one rate cut in September or later.
He’s also been quick to remind viewers that rate cuts are not bullish. And while the market seems addicted to them, in reality low rates mean weak economic conditions.
Adding fuel to the fire is the anticipation of the jobs numbers coming out tomorrow.
A weaker-than-expected report could increase pressure on the Fed to consider a rate cut sooner rather than later. But with the unemployment rate still at a relatively low 4%, the Fed remains focused on achieving a more sustained reduction in inflation before making any moves.
So long story short, while the Fed likes the progress it sees, it’s not enough to cut rates just yet.
As Powell said, “We can afford to take our time and get this right.” For now, the markets will have to wait a little longer for any rate cuts, with the next few months of economic data being crucial in shaping the Fed’s decisions.
— The Prosperity Pub Team
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