The uncertainty around trade tariffs and a sticky inflation is prompting the US Federal Reserve to not commit to a more firmly laid out path to lower interest rates, reflecting in Chair Jerome Powell's address to the Congress where he on February 11 reaffirmed his stance from last FOMC of not rushing with a rate cut.
US 10-year yield rose nearly five bps to 4.55%, extending last week’s gains from a low of 4.38%. This rise is partly due to Powell's patient stance on further interest rate adjustments. The caution on lowering rates was digested by S&P 500 which fell marginally at close.
Powell in his semi-annual Monetary Policy Report to the US Congress said, "With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation."
US inflation has cooled off sharply from the 2023 highs though it still remains above the Fed's target of 2%, with core inflation proving to be persistent. Powell's stance reiterates Fed's position that there needs to be stronger evidence US inflation moving towards the target, before it moves to cut rates.
"If the economy remains strong and inflation does not continue to move sustainably toward 2 percent, we can maintain policy restraint for longer. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly," said Powell.
Powell's worries stem from the fact that an early rate cut could spark inflationary pressures, given that labor market trend and consumption data shows that the economy can handle higher rates for longer. The US economy has been growing stronger-than-expected, coupled with low unemployment. The Fed's worry is pivoting too early may disrupt this, and cause volatility.
The US money markets are pricing in one rate cut of 25 bps by the Fed this year, likely by September 2025.
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