Powell At Crossroads As Inflation Bites Again: Fed Needs To 'Get Going On The Rate Cuts They Have To Make' Former Governor Says

If there’s something that’s likely to keep the markets on edge in the upcoming days, it’s undoubtedly the eagerly anticipated Federal Open Market Committee (FOMC) meeting scheduled for March 19-20, 2024.

While the decision regarding interest rates seems all but set, with the Fed expected to maintain them at 5.25%-5.50%, all eyes will be on two key factors: 1) The updated macroeconomic projections, which will unveil the ‘dot plot’, revealing the Fed’s favored path for interest rates, and 2) Fed Chair Jerome Powell‘s comments during the press conference.

Back in December, the Fed signaled a median preference for three rate cuts in 2024, followed by four more in 2025. During recent public appearances, Powell has hinted at the need to gain greater confidence in assessing the disinflationary trend towards 2% before considering rate cuts, though he has indicated a willingness to do so this year.

However, two unexpectedly high inflation reports released this week have altered the landscape, leading traders to temper their expectations of a June Fed rate cut.

Current market-implied probabilities show ‘only’ a 60% chance of a cut in June, as per the CME Group’s FedWatch Tool, with traders pricing in a cumulative 79 basis points of rate cuts by year-end, broadly in line with the earlier indication of three rate cuts by the Fed.

Will the Fed adhere to this projection, or will they suggest a downward revision in the pace at which they anticipate cutting interest rates this year and next?

Here are some expert perspectives on the matter.

Former Hawkish Fed Governor Now Turns Dovish

According to former St. Louis Fed President James Bullard, a notable hawk in the past, the Federal Reserve faces the risk of maintaining interest rates at elevated levels for an extended period if it postpones rate cuts until the latter half of the year. This delay could potentially damage the economy or result in falling short of its 2% inflation target.

During an exclusive interview with Market News (MNI), Bullard emphasized that policy should be nearing the neutral rate by the time inflation is within 50 basis points of 2%, in order to accommodate the challenges associated with accurately measuring inflation.

“Since last year there’s been a lot of disinflation, and the committee has to take that on board at some point and get going on the rate cuts they have to make,” Bullard told MNI.

He further suggested that even a slight reduction from current levels would still maintain a restrictive monetary policy, pushing inflation closer to the 2% target.

Also Read: Bitcoin Bloodbath: Digital Gold Loses Its Luster, But Are Investors Shaken Or Shopping?

Bank Of America’s Hartnett Raises ‘Policy Credibility’ Issues

According to Michael Hartnett, the chief investment strategist at Bank of America, the U.S. headline and core Consumer Price Index (CPI) are anticipated to trend at 3.6% and 4.0%, respectively, by June, coinciding with the expected rate cut by the Fed.

This implies that the Fed is tolerating higher inflation, which in turn eases the burden of U.S. debt. However, this could weaken policy credibility, consequently leading to a weaker currency. This dynamic partly explains why cryptocurrencies like Bitcoin BTC/USD and gold are currently at all-time highs.

Fed Is Not So Restrictive, Given The Economy’s Strength

Former Kansas City Fed president Thomas Hoenig suggested to Market News (MNI) that the Federal Reserve’s monetary policy stance may not be as restrictive as previously perceived, owing to the persistent strength of the economy.

He indicated that this suggests the central bank will likely proceed cautiously with interest rate cuts, potentially delaying them until the second half of the year.

“They’re restrictive but only moderately so and inflation is coming down but it’s coming down much more slowly now,” he said in an interview.

Economist Consensus Expects Fed To Stick To A Three-Cut Plan In 2024

Economists surveyed by Bloomberg News suggest that despite a recent uptick in inflation, Federal Reserve policymakers are unlikely to alter their forecasts, which currently project three interest-rate cuts this year and four in 2025.

Economists anticipate policymakers to revise their forecasts for U.S. gross domestic product (GDP) for 2024 to an annual rate of 1.7% from the previous projection of 1.4%. Additionally, they expect policymakers to increase their inflation projection to 2.5% from the previous estimate of 2.4%.

It’s important to note that the survey of 49 economists was conducted from March 8 to March13, prior to the release of hotter-than-expected producer inflation data on Thursday this week.

An outlier perspective comes from James Knightley, chief international economist at ING, who argued that with growth, employment, and inflation all currently exceeding comfortable levels, the Fed is not in a position to contemplate cutting interest rates in the near term.

Likewise, Joe Brusuelas, chief economist at RSM LLP, suggests that with the economy continuing to outperform expectations and consumers remaining resilient, the Federal Reserve may exercise more patience regarding rate cuts than both its own forecasts suggest and what the market has priced in. As a consequence, “the central bank may reduce its policy rate twice, or possibly fewer times, through the end of the year,” Brusuelas said.

Now Read: One Mark Back For Boeing? ‘Cockpit Mishap’ Likely Caused LATAM Flight To Plunge

Photo: Federal Reserve and an image generated with artificial intelligence with Midjourney.