Federal Reserve Chair Jerome Powell used his news conference Wednesday to throw cold water on market expectations that the Fed will start cutting interest rates in March.
“Based on today's meeting, I would tell you that I don't think it's likely that the committee will reach a level of confidence by the March meeting to identify March as the appropriate time to do so, but that's what it is,” Powell said.
“So, I wouldn't call it…the most likely case, or what we call the norm
“The case,” he added.
“March cut? Fuhggedaboutdit!” Derek Holt, chief capital markets economist at Scotiabank, wrote in a note to clients.
SPX DJIA shares closed lower and the 10-year Treasury yield BX:TMUBMUSD10Y fell below 4% after Powell's press conference.
Here are some other key points from the Fed Chairman's press conference:
The Fed wants to see 'the whites of the eyes of 2% inflation'
The Fed was hurt most in late 2021 and 2022 when they thought higher inflation would be temporary, said Bill Adams, chief economist at Comerica Bank. He said they wanted to avoid making the same mistake here.
“The Fed will wait to pull the trigger on interest rate cuts until it sees the whites of its eyes at 2% inflation,” Adams said.
Adams said the Fed is likely to begin tapering in June.
Powell did not say how many months it would take, so the Fed will have more confidence to ease. “I wouldn't put a number on it,” he said.
Once the Fed starts cutting interest rates, it may be difficult to stop
Greg Daco, chief economist at EY, said Powell appears to be signaling that interest rate cuts will come at every meeting once the easing cycle begins.
He pointed out that Powell said that the first cut “is a very important decision to begin the process of rolling back restrictions.” We want to get this right.
Quantitative tightening may last longer than many expect
Scotiabank's Holt noted that Powell said the Fed would begin considering changes to its ongoing program of shrinking its balance sheet, known as quantitative tightening, in March. The Fed is “looking at a variety of things over the next year or so,” he said.
That could be an indication, Holt said, of “the kind of timeline they're considering for ending the QT interval. This comment could mean rejecting the abrupt end of QT and a more compressed timeline.”
Many economists believe the QT period will end later this year.
The Fed wants more data on commodity prices and rents before it can be confident about inflation
Omair Sharif, president of Inflation Insights, said Powell's comments suggest that Fed officials are concerned that commodity prices may rise after months of declines.
“Commodities were the main driver of the slowdown” in core personal consumption expenditures and the core CPI. “The Fed seems unconvinced that this will continue,” Sharif said.
“In addition, as I have indicated in recent months, I think the Fed would like to see two months of equivalent rent data for renters/owners to feel more confident that sheltering will begin to lower core inflation more strongly in the coming months,” he said.
