Powell Delays Fed Rate Cuts, Says 'We Need Greater Confidence In Inflation': 2-Year Yields Spike To 5%

Fed Chair Jerome Powell stated Tuesday that progress towards the 2% inflation target has recently stalled, prompting the Federal Reserve to prefer holding rates and delaying policy easing to a more appropriate time in the future.

Powell acknowledged that the U.S. economy has been notably robust over the past year, with the labor market moving into a better balance despite ongoing strength. However, Powell highlighted during the Washington Forum on the Canadian Economy, hosted by the Wilson Center, that “recent data show a lack of further progress on inflation.”

Powell emphasized that although the 12-month core PCE inflation remained relatively unchanged at 2.8% in March, there was growing momentum in the 3-month and 6-month pace.

“We have stated that we need greater confidence in inflation before considering lowering interest rates. However, the recent data has not given us greater confidence that inflation is heading toward the 2% target,” Powell stated.

The Fed chair suggested that current policy is well positioned to hold current economic conditions, and in the event of a substantial weakening in the labor market, the Fed would have “significant space to ease.”

“It is appropriate to let restrictive policy take further time to work,” Powell said.

Market reactions: Policy-sensitive 2-year Treasury yields reached the 5% psychological mark as a response to Powell’s remarks. Yields on shorter-dated U.S. Treasuries are now on track to close at the highest level since Nov. 13, 2023, as traders further trim rate cut bets.

Fed futures currently indicate the market is pricing in less than 40 basis points of cumulative rate cuts by year-end, implying less than two quarter-percentage point rate cuts.

Chart: 2-Year Treasury Yields Spike To 5%, The Highest In Six Months

Stocks eased, reflecting the pressure from higher Treasury yields. The S&P 500 index, as tracked by the SPDR S&P 500 ETF Trust SPY, fell 0.2%, while small caps, as monitored through the iShares Russell 2000 ETF IWM, fell 0.5%.

Gold, as tracked by the SPDR Gold Trust GLD, held steady at $2,390 per ounce.

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Image generated using artificial intelligence via Midjourney.