Powell Dials Back Expectations on Rate Cuts

Federal Reserve Chair Jerome Powell said firm inflation during the first quarter had introduced new uncertainty over whether the central bank would be able to lower interest rates this year without signs of an economic slowdown.

His remarks indicated a clear shift in the Fed’s outlook following a third consecutive month of stronger-than-anticipated inflation readings, which appears to have derailed hopes that the central bank might be able to lower interest rates pre-emptively. Officials had previously said they were looking for greater confidence that inflation was returning to their target and were optimistic another month or two of data might meet that standard.

“The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence,” Powell said Tuesday at a moderated question-and-answer session in Washington.

Powell suggested that the Fed was likely to hold interest rates at their current level, a 23-year high, for an even longer period if inflation continued to run above the central bank’s 2% goal. The comment suggested additional interest rate increases aren’t likely if inflation is somewhat firmer than expected. He also indicated the Fed would be prepared to cut rates if the economy was slowing sharply.

“We think policy is well positioned to handle the risks that we face,” Powell said. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.”

Central bank officials started the year with guarded optimism that they would be able to cut interest rates several times beginning around midyear after inflation dropped more rapidly than they had anticipated at the end of 2023.

In December, Powell had pivoted from focusing on whether the Fed would need to raise rates again to when the central bank might be in a position to lower them. Market participants raced ahead and began anticipating a string of six or seven rate cuts, puzzling Fed leaders who didn’t think such exuberant expectations were aligned with their own outlook.

Still, Fed leaders, including Powell, maintained up through early this month that rate cuts were likely to be appropriate, even after economic activity and hiring had proven more resilient than expected. That kept front-and-center the possibility that officials would take back some of last year’s rate increases and shore up the prospects of a so-called economic soft landing.

Even President Biden, who had mostly avoided commenting on the Fed, joined in on the rate-cut guessing game, declaring shortly after his State of the Union address in March that the “little outfit” that sets rates might be lowering them soon. At their meeting in March, most Fed officials projected two or three rate cuts this year would be appropriate, with a narrow majority penciling in at least three cuts.

But reality has dealt the Fed and the White House a different hand, at least so far. Because inflation was firmer than anticipated in the first three months of the year, investors and central bank officials are coming to grips with the idea that the Fed will have to defer rate cuts, raising the risk that reductions won’t occur until the economy shows more obvious signs of weakening.

The consumer-price index, released last week by the Labor Department, showed core inflation in March was 3.8% from a year earlier. That broke a yearlong streak in which the 12-month change had declined in each month. Core inflation excludes volatile food and energy prices, and economists treat it as a better gauge of underlying price pressures.

The Fed’s preferred gauge, which will be released next week by the Commerce Department, is likely to show core prices rose 2.8% in March from a year earlier, the same as in February, according to estimates by Fed economists. The Fed targets 2% inflation over time.

After last week’s CPI report, most analysts on Wall Street changed their forecasts, scrapping expectations of a June rate cut. They see the Fed waiting until July, September or December to start lowering rates, and they expect just one or two cuts this year.

Write to Nick Timiraos at [email protected]