Sticky inflation in the US since this year has brought new uncertainty — whether the Federal Reserve will be able to cut interest rates this year with no signs of slowing down in the country. On Tuesday local time in the US, Federal Reserve Chairman Powell said that recent data shows a lack of further progress in inflation, and it may take longer to have confidence in inflation, so it may be appropriate for a high interest rate policy to work for a longer period of time.

Federal Reserve officials said earlier that they are seeking greater confidence in inflation, that is, inflation is returning to target, and they were optimistic that the data could reach this standard in another month or two.

In response, Powell recently stated that recent data shows a lack of further progress in inflation. Although inflation is progressing, it is not progressing fast enough. It has not brought us more confidence in inflation; on the contrary, it indicates that it may take longer to be confident in inflation.

Powell pointed out that the Federal Reserve's preferred inflation indicator, the personal consumer spending price index, showed that the core inflation rate in February was 2.8%, and there was little change over the past few months. However, he believes that the US CPI data for March is not a standard example of overheating demand.

Based on the above reasons, Powell believes that it may be appropriate to let the high interest rate policy work for a longer period of time. “We believe that the current policy position is a good response to the risks we face. Given the strength of the labor market and the progress made so far in inflation, it is appropriate to allow more time for restrictive policies to continue to work. Until inflation shows more progress, we can keep interest rates at current restrictive levels for as long as needed.”

Powell added that the Federal Reserve knows that FOMC monetary policy decisions can affect many countries around the world, and the Federal Reserve is trying to maintain policy transparency and predictability.

Powell said that the US economy has performed strongly in the past year, the labor market continues to be stable, the balance between supply and demand in the job market has further improved, and wider wage pressure continues to gradually ease. 2023 is a year of supply-side recovery.

Powell also mentioned that it is still too early to say that the US or the Federal Reserve are learning lessons from the COVID-19 pandemic. The Federal Reserve can and has learned many lessons from the US banking thunderstorm in 2023.

Nick Timiraos, a well-known financial journalist known as the “New Federal Reserve News Agency,” wrote:

Powell's latest speech shows that after three months of stronger than expected US inflation data, the Fed's outlook on the outlook has clearly changed, which seems to have broken hopes that the Fed may “pre-emptively” cut interest rates.

Powell hinted that if inflation continues to rise above the Fed's 2% target, the Fed may keep interest rates at their highest level in 23 years for a longer period of time. This means that if inflation is slightly higher than expected, additional interest rate hikes are unlikely. He also said that if the US economy slows down sharply, the Federal Reserve will be ready to cut interest rates.

With the release of higher-than-expected US inflation data for the first three months of this year, investors and Federal Reserve officials are beginning to accept the idea that interest rate cuts will have to be postponed, increasing the risk that interest rate cuts will not occur until the US economy shows more obvious signs of weakness.

Federal Reserve officials were cautiously optimistic at the beginning of the year, believing that after experiencing a faster than expected decline in inflation, they would be able to cut interest rates several times starting in the middle of this year. In December of last year, Powell's position changed significantly, shifting his focus from whether the Federal Reserve needed to raise interest rates again to when it might be possible to cut interest rates.

Although the US inflation data for January and February of this year showed signs of rising, at the March FOMC meeting, most Federal Reserve officials still expected that it would be appropriate to cut interest rates two or three times this year. Among them, a weak majority of officials expected to cut interest rates at least three times. Until the beginning of this month, senior Federal Reserve officials, including Powell, insisted that it might be appropriate to cut interest rates next.

Market participants are even more aggressive. At one point, it was expected that interest rates would be cut six or seven times this year, far exceeding the expectations of senior Federal Reserve officials about the number of interest rate cuts. Even US President Joe Biden, who usually avoids commenting on the Fed's policies, has joined the ranks of commenting on interest rate cuts. It is expected that the Fed may cut interest rates soon.

Generally speaking, the possibility that the Federal Reserve will cut interest rates during the year and that the US economy can land softly was the mainstream view of the market for several months before.

However, the US inflation data in March once again exceeded expectations, and interest rate cuts ushered in a critical turning point. The US core CPI inflation in March was 3.8% year-on-year, breaking the trend where this indicator has been cooling down every month for a year. Core inflation excludes volatile food and energy prices, which economists see as a better measure of potential price pressure.

Following last week's CPI report, many senior Federal Reserve officials spoke out frequently. The mainstream tone was to emphasize the policy's dependence on data, and they are currently not in a hurry to cut interest rates. Most Wall Street analysts have revised their forecasts for interest rate cuts. Many institutions expect to cut interest rates only once or twice this year, and the first rate cut will be later than previously anticipated.

Powell made a hawkish statement on Tuesday. The market further weakened bets on the Fed's interest rate cut. US stocks and US bonds declined intraday, and emerging market currencies hit a new low.

Editor/Somer