Source: Gelonghui

The Federal Reserve is in no hurry to cut interest rates until more evidence of slowing inflation arrives.

On Thursday EST, the Federal Reserve officials once again collectively “set off the hawk.” Cleveland Federal Reserve Chairman Mester, New York Federal Reserve Chairman Williams, Richmond Federal Reserve Chairman Barkin, and Atlanta Federal Reserve Chairman Bostic each issued warnings that inflation may take longer to reach the 2% target.

The four major voting committees of the Federal Reserve are all “eagles”

Meester, who has the right to vote in the FOMC this year, said interest rates should remain high for a longer period of time.

She pointed out that policymakers need more data to be convinced that the inflation rate is moving towards the Federal Reserve's 2% target.

“As our understanding of the path of inflation gradually becomes clear, it is prudent to maintain our restrictive stance for a longer period of time.”

Earlier this week, Mester pointed out that monetary policy is in a “good position,” and it is still too early to say that progress in inflation has stalled.

Williams, the “No. 3 person in the Federal Reserve,” who has a permanent vote on monetary policy, also believes that there is no reason to adjust monetary policy now.

“I'm not seeing any indicators that tell me that there is a reason to change the monetary policy position now. Nor do I expect to gain confidence that inflation will continue to move towards the 2% target in the short term.”

He said that although the latest inflation data should not be overemphasized, the April CPI report was indeed a positive development after months of disappointing inflation data.

If the personal consumption expenditure price index (PCE) is used as an inflation indicator, the average inflation level for the whole of this year is expected to be 2.5%, which may reach 2% by the end of the year, and the average inflation level is expected to remain at 2% next year.

Regarding the future policy path of the Federal Reserve, Williams said that to change monetary policy, policymakers need to be confident that inflation will remain at 2%, but this does not mean that they will have to wait until inflation falls to 2% before taking action.

Similarly, Barkin, who has the right to vote in decision-making this year, also said that the Federal Reserve will need a little more time to reduce inflation.

“In order to reach 2% sustainably in the right way, I think it will take some time.”

Barkin said that the April report of stagnant retail sales showed “consumer spending is good, but not very good.” This is one of the issues, that is, how hot demand is.

US demand will need to slow down a bit to get inflation to meet the Federal Reserve's target. He pointed out that with the recovery of the supply chain, commodity inflation has declined sharply.

Bostic, which recently “threw cold water” on interest rate cuts, also warned that it is necessary to be patient with interest rates.

“I'm happy with how inflation progressed in April, but the Federal Reserve hasn't done that yet. The Federal Reserve must be patient and alert; there is still a lot of price pressure in the economy.”

He said he remains “firm” and “wary” about inflation. If the outlook is as he anticipated, “inflation slowly slows and economic momentum continues,” then it may be appropriate to cut interest rates before the end of the year.

Did the Federal Reserve cut interest rates as early as September?

Since July of last year, the Federal Reserve has kept the benchmark interest rate unchanged in the 5.25%-5.5% range, the highest level in 23 years.

The Federal Reserve remained on hold during the latest May interest rate meeting. Powell said on Tuesday that officials will “need to be patient to let restrictive policies work.”

According to CME's FedWatch tool, market participants expect that the probability that the Fed will not cut interest rates in July is 68%, and the possibility of cutting interest rates in September is about 50%, and may cut interest rates 2 times during the year.

Judging from the inflation data, the index for measuring America's potential inflation in April fell for the first time in six months. This provided some progress in the direction that Fed officials wanted to see before cutting interest rates.

According to the data, the US consumer price index (CPI) rose 3.4% year on year in April, up 0.3% from March. Excluding highly volatile factors such as food and energy, core CPI rose 3.6% year on year in April, the smallest increase since April 2021.

After inflation cooled more than expected in April, it once again sparked market speculation about when the Federal Reserve is preparing to start cutting interest rates.

Traders seem increasingly convinced that the Federal Reserve may start cutting interest rates as early as September. The probability of interest rate cuts also rose to 70% in September, but market expectations fell again after the Federal Reserve officials collectively hawked the hawk.

According to CME's FedWatch tool, market participants currently expect that the probability that the Fed will not cut interest rates in July is 68%, and the possibility of cutting interest rates in September is about 50%, and may cut interest rates 2 times during the year.

Similarly, there are analysts who are unsure about the prospects of cutting interest rates soon.

Jerome Schneider, head of short-term portfolio management at Pacific Investment Management Company (PIMCO), said on Thursday that the latest US inflation data confirmed to investors that the possibility of a recent rate hike has now been “ruled out.”

“I think from a more specific perspective, we have to really understand that we're already celebrating lower inflation, and so is the market. But in specific circumstances, we are specifically considering the long-term trajectory of how the Federal Reserve will respond.”

He said that more importantly, take a close look at the CPI and the PCE inflation index that the Federal Reserve places more emphasis on. The specific sub-indicators of these data remain relatively flexible.

“In fact, to keep these core figures below 3%, we have to see 0.2% or less for the rest of the year. We're still far above that number.”

He added that while the latest inflation data provided some comfort, it might not be possible in time against the backdrop of the Federal Reserve quickly returning close to the 2% target.

The Federal Reserve will hold its next meeting on June 11-12.