US Fed signals no rush for rate cuts amid elevated inflation, but markets trim losses as Powell downplays worry

US stocks initially fell and bond yields rose, but later trimmed losses as Jerome Powell said the change to inflation reference was not meant to send any signal.

The US Federal Reserve kept interest rates unchanged at 4.25 percent-4.5 percent in its latest policy decision, reinforcing its cautious stance as inflation remains "somewhat elevated." Markets initially dropped following the announcement, with investors interpreting the Fed’s omission of a previous reference to inflation progress as a sign of lingering inflation risks.

However, stocks later trimmed losses as Fed Chair Jerome Powell downplayed the change, insisting it was not meant to signal any shift in policy direction. “We just decided to shorten that part of the statement,” Powell said in his post-meeting press conference. “It was not meant to send a signal.”

US stocks initially fell and bond yields rose, interpreting the omission as a sign that the Fed might be less confident about inflation cooling. However, as Powell reassured investors that the policy outlook had not changed, stocks trimmed losses and bond yields cooled.

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The S&P 500 ended down 0.5 percent, the Nasdaq 100 dropped 0.2 percent, and the Dow Jones Industrial Average slipped 0.3 percent; the yield on 10-year Treasuries was little changed at 4.53 percent.

On the other hand, the Fed signalled it is in no rush to cut rates after easing policy by a full percentage point in late 2024. “We do not need to be in a hurry to adjust our policy stance,” Powell said, adding that the Fed needs to see “real progress” on inflation or significant weakness in the labour market before considering further cuts.

The Fed’s decision comes amid a resilient US economy, with Powell highlighting strong growth and a “solid” labour market. While some sectors, such as housing, have stabilised after weakness in early 2024, Powell acknowledged that low-income households continue to struggle with the lingering effects of past inflation.

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Looking ahead, the Fed signalled it will continue to be guided by economic data rather than market expectations for rate cuts. Powell also addressed concerns over financial stability, noting that while equity prices are elevated, the Fed’s restrictive policy stance is helping to prevent excessive risk-taking.

“We want policy to be restrictive enough,” Powell said, “but at the same time, we don’t want further weakening in the labour market.” The Fed would want to see sustained improvement on inflation or signs of economic weakness warranting a further rate cut, he said.

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