Fed Signals Longer Wait for Rate Cuts Amid Persistent Inflation

Fed Chair Powell signals rates to stay higher for longer as sticky inflation persists, with implications for the economy and markets.

Shivani Chauhan
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Fed Signals Longer Wait for Rate Cuts Amid Persistent Inflation

Fed Signals Longer Wait for Rate Cuts Amid Persistent Inflation

Federal Reserve Chair Jerome Powell signaled that the central bank is likely to keep interest rates higher for longer, as recent inflation data point to the need to keep rates higher for longer to firmly bring inflation back down to the Fed's 2% goal. Powell indicated that it will likely take more time than previously expected for officials to gain the necessary assurance that price growth is heading towards the target before lowering borrowing costs.

In recent months, Fed officials have emphasized their desire for more evidence that inflation is truly falling back to the 2% target before considering cutting rates. However, the U.S. economy today, with housing starts and permits nosediving in March, has continued to show surprising strength, with robust job growth, strong consumer spending, and inflation that remains stubbornly above the Fed's objective. Powell acknowledged that sticky inflation data in the first quarter of the year are not showing the progress the Fed needs to begin easing monetary policy.

Powell's comments mark a departure from his previous assurances that the overall outlook had not changed much despite some hotter-than-expected inflation readings at the start of the year. He said the Fed's preferred inflation gauge, the Personal Consumption Expenditures Price Index (PCE) excluding volatile food and gas prices, is expected to be little changed for March over February, well above the 2% target. Fed Vice Chair Philip Jefferson also warned that if inflation remains sticky, rates will need to be held higher for longer.

Why this matters: The delay in potential interest rate cuts amid inflation has significant implications for the U.S. economy and financial markets. Higher borrowing costs for an extended period could weigh on economic growth, the housing market, and consumer spending. The prospect of a longer wait for rate cuts is also impacting global currencies, as the U.S. dollar continues to strengthen amid expectations of higher-for-longer interest rates.

Powell emphasized that the Fed will maintain the current level of policy restriction for as long as needed until inflation gets closer to the 2% target. He said patience is likely to remain the watchword as the central bank waits to be sure inflation will resume its decline. The Fed's rate currently stands at a 23-year high of 5.3% after 11 rate hikes beginning two years ago. Powell's comments suggest the Fed is taking a more hawkish stance and is in no rush to cut rates, as it typically does when the economy weakens.

Key Takeaways

  • Fed Chair Powell signals rates to stay higher for longer to curb inflation.
  • Recent economic data shows surprising strength, hampering Fed's inflation fight.
  • Delay in rate cuts could weigh on growth, housing, and consumer spending.
  • Fed to maintain restrictive policy until inflation nears 2% target.
  • Fed adopts a more hawkish stance, unlikely to cut rates soon despite economic weakness.