Fed Chair Jerome Powell declined to say whether there would be a rate cut in March as many investors had hoped. Instead, he said inflation was “still too high” and that “ongoing progress in bringing it down is not assured.”
The agency kept rates unchanged at a range of 5.25–5.50 percent. The Fed chair said it wouldn’t be appropriate to cut rates until there’s “greater confidence” that inflation is moving toward the central bank’s target rate of 2 percent. In December 2023, inflation came in at 3.4 percent.
According to the CME’s FedWatch tool, investors see only a 16.5 percent possibility of a 50-point rate cut in the policy-making meeting of the Federal Open Market Committee (FOMC) in March, down from 40.4 percent a week back, before the Fed decision to keep the rates unchanged. A vast majority, 83.5 percent, expect the current rates to remain unchanged in the March meeting as well.
Higher yields are usually bad news for stocks because this makes bonds an attractive investment option, diverting money from the stock market. This is because bonds are backed by the government and are thus seen as a safe option while stocks are not.
A high yield also makes the dollar stronger, adding pressure on stocks as foreign earnings of U.S. companies can be negatively affected.
For the everyday American citizen, higher yields mean they will have to pay more in mortgage rates, student debts, credit card rates, car loans, and other forms of debts. Business financing can also become expensive.
“There is no reason for U.S. Treasurys to rally,” Althea Spinozzi, a senior fixed-income strategist at Saxo Bank told Bloomberg. “If inflation stays stubbornly above the Fed’s 2 percent target, there is a chance that the Fed will disappoint markets on rate cuts.”
Last week, Goldman Sachs, Barclays, and Bank of America pushed back their Fed rate-cut forecast from March.
Interest Rate Issue
During in an interview with CBS’s “60 Minutes” on Sunday, Mr. Powell said that while the Fed has not yet decided to cut interest rates, it is committed to reducing the rates this year.When asked why rates were not being cut despite avoiding a recession, Mr. Powell replied, “We have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7 percent unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.”
“We want to see more evidence that inflation is moving sustainably down to 2 percent. We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.”
The Fed chair said they want to see “more good data.” He admitted that every member in the FOMC believes rate cuts would be “appropriate” this year.
Mr. Powell also said that the agency may not wait for inflation to go all the way down to 2 percent before implementing interest rate cuts. “We’re actively considering now going forward cutting rates.”
“The longer it takes for the Federal Reserve to cut rates, the more difficult it will be to implement any of them because 2024 is an election year,” he wrote.
“I fear that if the Fed does not cut before the campaign, it will not be able to interfere in the election process with unjustified rate cuts that may be seen as a benefit to the incumbent.”
Peter Schiff, chief economist and global strategist at Euro Pacific Asset Management, criticized the Federal Reserve on how it is handling interest rates.
“The #Fed officially let everyone know it’s done hiking rates, but dialed back expectation for when it will start cutting. I wonder how long it will take before the financial community realizes just how bad the #recession will be or how much bigger the #inflation problem will get,” he said in an X post.
