Federal Reserve chair Jerome Powell has downplayed the likelihood of rate hikes in its next policy meeting following the central bank’s decision to hold rates at 5.25–5.5 per cent this week.
In a press conference on Wednesday, Powell termed it “unlikely” that the next policy rate move will be a hike, though he noted inflation is “still too high” and “further progress in bringing it down is not assured”.
“Our restrictive stance of monetary policy has been putting downward pressure on economic activity and inflation, and the risks to achieving our employment and inflation goals have moved toward better balance over the past year. However, in recent months, inflation has shown a lack of further progress toward our 2 percent objective, and we remain highly attentive to inflation risks,” he said.
He observed that it remains above the Federal Reserve’s longer-run goal of 2 per cent, with consumer prices growing 0.4 per cent in March to push the annual rate up to 3.5 pr cent.
However, after the stubborn inflation figures stoked concerns of delayed rate cuts or even potential rate hikes, Powell’s latest comments have been welcomed by markets.
Principal Asset Management’s chief global strategist, Seema Shah, remarked that Powell’s press conference “ultimately delivered a fairly dovish surprise”.
“Recent upside inflation and wage surprises have meaningfully shifted the market’s rate expectations. From the start of the year, when consensus was for seven to eight rate cuts this year to now expecting just one cut, market forecasts have undergone a major upheaval. Fed officials have also introduced significant hesitation and uncertainty around their disinflation narrative, while several market commentators have even started to discuss the possibility of further rate hikes,” she explained.
However, the May meeting indicated Powell’s optimism is “still alive and kicking”, Shah said, with the Fed chair dismissing talk of stagflation and maintaining the labour market is coming into better balance.
“Chair Powell still sees rate cuts as a possibility this year but admitted it will take longer to get started than the Fed initially expected. Markets will be pleased with his dovish tilt and assertion that the policy discussion was ‘about holding the current level of restriction’ rather than the potential for further rate hikes.
“Nonetheless, it is worth remembering that this is the same Fed who thought inflation was transitory, and who danced a victory lap as recently as late-2023 that inflation was conquered. The reality is that the near-term policy path is highly uncertain, and the Fed will be responding to the unfolding economic data just as we all are.”
Shah predicted the Fed will cut rates twice this year, starting in September.
James McCann, deputy chief economist at abrdn, also forecast the Fed to implement cuts of 25bps in September and December, if inflation moderates over coming months.
Looking at how markets reacted, he explained: “Bonds and equities rallied during the meeting, helped by a less hawkish than feared Powell, which pushed expectation for easing a little higher, and a slightly larger reduction in QT than anticipated.”
However, GSFM investment strategist Stephen Miller observed that markets are pricing in one 25 basis point cut in the policy rate.
“Given the measured tone of Fed statement and the less hawkish disposition presented by the Fed chair’s press conference, that seems a reasonable expectation,” he said.
This has seen equity markets rally stronger, he explained, with bond yields declining and a weaker USD following the Fed announcement.
Meanwhile, Jack McIntyre, portfolio manager at Brandywine Global, noted monetary policy currently is well positioned, with the Fed not expecting growth to accelerate.
“Think of this outlook as ‘high for longer’ as opposed to ‘higher for longer’,” he explained.
“The only surprise came on the quantitative tightening (QT) side of policy by cutting the pace of reduction in US Treasuries. This adjustment doesn’t mean QT is ending anytime soon, only that a smoother ride is likely.”
At its next meeting in June, it will be important for the Federal Reserve “to see the projections for the longer-term equilibrium fed funds rate, since it has implications for where the 10-year Treasury rate ends up,” he added.
