Federal Reserve Chair Jerome Powell attempted to push back against investors’ growing expectations of interest-rate cuts in the first half of 2024.
Wall Street responded by doubling down on Friday, despite Powell’s warning that “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.”
Markets now place odds of a quarter-point cut by the Federal Open Market Committee’s March meeting well above 50%, and are fully pricing in a cut in May, as traders viewed Powell’s comments as sufficiently balanced to leave the door open to such a pivot. That followed a round of manufacturing data released earlier on Friday adding to other measures that signal growth is slowing.
“Powell was more balanced than hawkish, which given the current backdrop might as well be dovish,” BMO Capital Markets strategists Ian Lyngen and Benjamin Jeffery wrote in a note.
In a speech in Atlanta Friday, the Fed chief signaled that policymakers expect to leave interest rates steady when they meet Dec. 12-13, giving themselves more time to evaluate the economy after raising rates aggressively from near zero in March 2022 to above 5% in July.
“Having come so far so quickly, the FOMC is moving forward carefully, as the risks of under- and over-tightening are becoming more balanced,” Powell said at Spelman College, a historically Black school in Atlanta, while adding that policymakers are “prepared to tighten policy further if it becomes appropriate to do so.”
A slowing US economy and fall in the inflation rate have also raised expectations among investors that the central bank could begin to cut rates as soon as March.
The two-year Treasury note’s yield declined as much as about 14 basis points to 4.54%, the lowest level since June, as traders priced in a larger total amount of rate cuts they consider likely over the next year. Swap contracts that anticipate the outcome of Fed policy meetings priced in an effective rate of about 4% in December 2024, compared with 5.33% currently.
Conversely, Fed officials projected rates at 5%-5.25% at the end of next year, according to their median forecast released in September — just one-quarter point lower than the current level. Policymakers will submit updated projections for interest rates and the economy at their next meeting.
Despite Powell’s push-back, investors focused on his remarks that policy is now “well into restrictive territory” and that the full effect of previous rate hikes are still working through the economy.