The Fed's outlook on possible interest rate cuts has changed in the wake of Powell and strategist Blake Gwinn suggesting a longer time frame before any moves. The comments point to somewhat guarded monetary policy when taken in conjunction with recent inflation data.
On Tuesday, Powell said that reaching the Fed's 2% inflation target could take "longer than expected" and signaled he was not eager to jump into rate cuts. Those comments would step back from prior pledges to make adjustments if the hotter-than-expected inflation prints materialized.
Strategist Blake Gwinn from RBC Capital Markets is echoing Powell's cautious tone, seeing the Fed now only cutting once in December from their previous forecast of three cuts. Gwinn points to a changing rhetoric from Fed members in which there is less focus on seeing spikes in inflation as transitory.
And while Powell has refused to lay out any timeline of rate moves, the market's read has shifted: investors are now pricing the first cut in September, down from June, according to the CME FedWatch tool. That shift comes with concerns over both sustained inflationary forces and a strong labor market.
The latest inflation data, inclusive of the Personal Consumption Expenditures Price Index (PCE), do not point at any improvement in the inflationary levels from the one that was seen last year. Powell cited a need to see much stronger evidence of sustained inflation running well above the Fed's 2% target before any policy moves.
Powell stays cautious in signaling that the present rates, falling in the range of 5.25-5.5%, are somehow restrictive, thus containing inflation. Despite such hints, there still does not seem to appear any "us-versus-them" confrontation, and when asked about his reappointment or replacement, Powell says: However, the Fed stands ready to adjust policy, underscoring a commitment to returning inflation to 2% over time.
Though much ambiguity loiters over the path of rate adjustments, the comments from Powell and the market sentiment give the impression of a policy wait of many months before any major policy changes. If anything, it has shown that the Fed is on guard for inflationary pressures and evolving economic data with a balanced approach to monetary policy.
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