Fed’s Powell sees US cuts in 2024 but inflation progress a risk

© Reuters. FILE PHOTO: Federal Reserve Chair Jerome Powell holds a press conference following the release of the Fed’s interest rate policy decision at the Federal Reserve in Washington, U.S., January 31, 2024. REUTERS/Evelyn Hockstein/File Photo

(Reuters) – U.S. Federal Reserve Chair Jerome Powell said on Wednesday that continued progress on inflation “is not assured,” though the central bank still expects to reduce its benchmark interest rate later this year.

“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in remarks prepared for delivery to the House Financial Services Committee as U.S. lawmakers prepare to face inflation-weary voters in a charged presidential election year.

“But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured,” Powell said.

MARKET REACTION:

– S&P 500 e-mini futures added to gains and were up 0.59%

– The yield on benchmark U.S. 10-year notes fell 1.4 basis points to 4.123%. The 2-year note yield ticked higher but was still off 1.9 basis points at 4.5328% vs late Tuesday

– The dollar index extended a loss to -0.29% at 103.48; with the euro added to a 0.28% gain to $1.0885.

COMMENTS:

MARVIN LOH, SENIOR GLOBAL MACRO STRATEGIST, STATE STREET, BOSTON

“Powell pretty much straight out said that they’re done with rate hikes. That’s a big risk the market was concerned with. Certainly, they feel that policy is restricted enough that it’s going to do its job. It’s just a matter of how long it’s going to take. It’s very similar to what he said in January and it really was the market that overinterpreted the probability of cuts being too aggressive.

“What we’ve seen is a committee that’s not sure about inflation versus being in restrictive territory. There’s a group that says that until we really get inflation moving to 2% convincingly, we need to stay tight. Then there’s another group that’s like, ‘you know what? We’re restrictive. Our neutral rate is 2 1/2% and we’re over double that. We should be in a position to start normalizing rates.’

“They’re comfortable with the idea of rate cuts just to start to normalize the process. That’s the next step. But how quickly you get there really is where the market’s playing on the fringe.”

CHRIS ZACCARELLI, CHIEF INVESTMENT OFFICER, INDEPENDENT ADVISOR ALLIANCE, CHARLOTTE, NORTH CAROLINA      “The chairman has been consistent at least in some of the last couple meetings and the fact that Powell has reiterated that they will cut rates later this year, I think is good for the markets.      “The markets went from expecting a lot of rate cuts to just starting to worry about whether or not the Fed was going to cut at all this year, and the fact that they were saying that they still want to cut, I think on balance is good news for markets.”

PHIL BLANCATO, CHIEF EXECUTIVE OFFICER, LADENBURG THALMANN ASSET MANAGEMENT, NEW YORK”The comments are in line with what we expect from the chair at this point. He’s been very measured in what he said about the overall health of the U.S. economy. And from an inflationary standpoint, we’re not there yet. His comments are going to once again support the narratives that the Fed’s not ready to cut yet and that means the first cut is more likely in the fall rather than anytime sooner.”

RICK MECKLER, PARTNER, CHERRY LANE INVESTMENTS, NEW JERSEY

“I don’t think stock investors expected much different from him (Powell). It’s still significant that they (the Fed) expect rates to be lowered later this year and that’s really what investors have been focused on – that the end seems in sight for the really restrictive front-end rates.”

“(Investors) continue to seek stocks that have high growth rates and can do well in the current economy.”

KARL SCHAMOTTA, CHIEF MARKET STRATEGIST, CORPAY, TORONTO

    “Powell clearly warned markets against expecting an imminent pivot to rate cuts, following in many of his colleague’s footsteps in saying that the Fed will need “greater confidence that inflation is moving sustainably to 2%” before beginning to ease. He did acknowledge that it will likely be appropriate to begin dialing back policy restraint at some point this year,” but also noted that price risks – as embodied in January’s hotter-than-expected data – could mean that “ongoing progress toward our 2% inflation objective is not assured”.

    “Odds on an upward move in the “dot plot” summary of economic projections at the Fed’s late-March meeting are firming somewhat, but Powell broadly failed to “outhawk” markets and the dollar is holding steady relative to its major rivals.”