Source: Gelonghui
There was little suspense about “standing by and without action” in May.
At 2:00 a.m. Beijing time on Thursday, the Federal Reserve will announce the latest interest rate decision, followed by Powell's speech.
The market expects that the Federal Reserve will continue to “stand still” in May, keeping interest rates between 5.25% and 5.5%. Investors' main focus is on Powell's thoughts and hints on interest rate cuts.
However, it is likely that Powell will repeat that he is not in a hurry to act in the short term because 2024 inflation is more severe than expected.
The schedule for interest rate cuts is up in the air
After several consecutive inflation reports surpassed expectations, the Federal Reserve will be more cautious about the prospects for cutting interest rates this year.
According to the data, the PCE price index rose 0.3% month-on-month and 2.7% year-on-year in March, exceeding market expectations of 2.6%. Excluding food and energy, the core PCE price index rose 0.3% month-on-month and 2.8% year-on-year, higher than market expectations of 2.7%.
The CPI rate in March was 3.5% per annum, the highest level since September 2023. The forecast was 3.4%, the previous value was 3.20%; the core CPI rate was 3.8%, the forecast was 3.70%, and the previous value was 3.80%, all exceeding market expectations.
Strong economic data from the US shows that inflation is still sticky.
Furthermore, the quarterly adjusted annualized growth rate of US GDP in the first quarter was 1.6%, far below market expectations of 2.5%.
This is the lowest level since the second quarter of 2022, which also raised market concerns about the stagnation of the US economy.
The Federal Reserve's interest rate cut schedule seems to have to be delayed.
Despite the March meeting, the Federal Reserve is also expected to cut interest rates three times in 2024.
However, since then, Powell and Federal Reserve officials have been “hawking” one after another, saying that these plans have been put on hold and that subsequent interest rate cuts will depend on improvements in inflation.
Just two weeks ago, Powell said that the pace of price increases has basically weakened the confidence of Federal Reserve officials that inflation will return steadily to target, thereby reducing the possibility of interest rate cuts in the short term.
He pointed out that as long as inflation remains high, the Federal Reserve will abandon any interest rate cuts.
“If inflation does continue to rise, we can maintain the current (interest rate) level as needed.”
The market also lowered its expectations for 2024 in response to these remarks.
Currently, traders expect to cut interest rates only once this year, which is lower than the median estimated three interest rate cuts by the Federal Reserve in March.
Will interest rates be cut during the year?
Since ending 11 rate hikes in July last year, the Federal Reserve has maintained the federal funds rate target at 5.25% to 5.50%, a 23-year high.
At the beginning of this year, most economists predicted that interest rates would be cut as many as six times during the year, and that the Federal Reserve would lower the benchmark interest rate at the May meeting.
But now, expectations for interest rate cuts have been drastically lowered over and over again.
According to the CME FedWatch tool, traders expect the probability of cutting interest rates at this meeting is only 2.5%.
However, the Federal Reserve's first rate cut has been postponed until December of this year, and the probability is less than 50%.
Nick Timiraos, the “Federal Reserve's microphone,” said that three consecutive months of disappointing inflation data have shattered today's prospects for the Federal Reserve to lay the foundation for cutting interest rates in the summer.
The question now is whether the better-than-expected wage growth in the last quarter will prompt a broader reflection within the Federal Reserve on how to manage the “last mile” of reducing inflation.
Over the past six months, Powell has downplayed concerns about rising inflation, but the wage growth report released by the US Department of Labor on Tuesday may make the Fed's wait-and-see attitude less comfortable.
He pointed out that within the central bank, some officials think there is no need to cut interest rates this year because the economy is strong, and they are worried that inflation will stay well above 2.5%.
The latest data supports them and increases the possibility that officials will wait to see more evidence of an economic slowdown.
edit/lambor