Fed official rebukes market, denies talks of rate cuts
New York Federal Reserve President Pushes Back on Rate Cut Speculation
The Economic Indicator Screaming That Inflation Is Not Vanquished
New York Federal Reserve President John Williams has dismissed the idea that the Federal Reserve is currently considering interest rate cuts. In an interview with CNBC, Williams stated that the focus of the Federal Open Market Committee is on determining whether monetary policy is restrictive enough to bring inflation back down to 2%. These remarks contradict the market’s interpretation of Fed Chairman Jerome Powell’s recent comments.
This week, two better-than-expected inflation reports solidified the Fed’s decision to maintain steady rates and avoid hiking. However, investors, analyzing the economic landscape and Powell’s press conference, are now anticipating multiple rate cuts starting as early as March.
According to the CME Group’s FedWatch tool, investors currently predict a 70% probability of rate cuts in or before March. This projection is based on futures contract prices for rates in the short-term market targeted by the Fed. It is worth noting that while the Fed’s updated projections indicate around three rate cuts in the coming year, investors are pricing in at least six rate cuts, highlighting a discrepancy with the central bank’s expectations.
When asked about the possibility of a rate cut in March, Williams deemed it premature to even consider. He also mentioned the potential for further rate hikes if inflation were to unexpectedly rise, which would be concerning for investors.
Williams emphasized that while the current stance of monetary policy appears to be sufficiently restrictive, circumstances can change. He acknowledged that data can shift in surprising ways and emphasized the need to be prepared to tighten policy further if inflation stalls or reverses.
This week, the stock market reached new records as investors grew optimistic about the prospect of rate cuts.
The Bureau of Labor Statistics reported that inflation, as measured by the consumer price index, decreased to 3.1% for the year ending in November, down from a peak of 9% in June of the previous year. Additionally, wholesale inflation, measured by the producer price index, declined to 0.9%.
On Wednesday, officials revised their inflation projections. They now anticipate inflation, as measured by the personal consumption expenditures index, to reach 2.8% by the end of this year, compared to the previous projection of 3.3% in September. By the end of 2024, they expect inflation to fall to 2.4%.
The Fed anticipates a slowdown in the economy next year but still projects a positive gross domestic product gain in 2024.
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How do Williams’ comments contradict the market’s interpretation of Powell’s recent comments?
See a 30% chance of a rate cut in March and a 76% chance of at least one rate cut by the end of the year. This speculation has been fueled by Powell’s recent comments, where he stated that the Fed will “act as appropriate” to sustain the economic expansion. However, Williams’ comments seem to suggest otherwise.
In the interview, Williams emphasized that the current focus of the Federal Open Market Committee (FOMC) is on achieving their inflation target of 2%. He stated, “The question is how do we make sure that monetary policy is not impeding [inflation’s return to 2%], but is actually in support of that?” Williams believes that the current monetary policy is appropriate and is not yet restrictive enough to warrant rate cuts.
Williams’ remarks contradict the market’s interpretation of Powell’s recent comments, which were seen as dovish and indicated the possibility of rate cuts in the near future. Powell mentioned that the Fed is closely monitoring the impact of trade tensions and is prepared to “adjust our views on appropriate policy” if necessary.
The market’s expectation of rate cuts was further reinforced by two better-than-expected inflation reports this week. The Consumer Price Index (CPI) and Producer Price Index (PPI) both showed signs of moderate inflation growth, easing concerns about deflationary pressures. These reports added to the narrative that the Fed would be more inclined to cut rates to stimulate economic growth.
However, Williams’ comments highlight the divergence of opinions within the FOMC. While Powell acknowledged the risks posed by trade tensions and the need to sustain the economic expansion, Williams focuses more on the inflation target. This discrepancy in perspectives further adds to the uncertainty surrounding the future path of monetary policy.
It is important to note that Williams is the vice chairman of the FOMC and holds a permanent voting position, making his comments significant. His dismissal of rate cut speculation suggests that there may be divisions within the Committee regarding the appropriate course of action. This uncertainty can potentially create volatility in the markets as investors grapple with conflicting signals from Fed officials.
While the market remains divided on the timing and extent of rate cuts, investors will likely closely monitor future speeches and comments from various Federal Reserve officials, including Powell and Williams, to gain further insight into the potential direction of monetary policy. The market’s reaction to economic data releases and trade developments will also play a crucial role in shaping the Fed’s decisions.
Overall, Williams’ pushback on rate cut speculation highlights the complexity of the current economic landscape. As the Fed navigates through uncertain trade conditions and aims to achieve its inflation target, the path of monetary policy remains uncertain. Investors will need to closely monitor upcoming events and statements from Fed officials to assess the probability of rate cuts in the near future.
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