Investors anticipating Federal Reserve rate cuts that would undermine the market have started 2024 with one bad news after another. Three hot inflation reports, an escalating conflict in the Middle East, rising oil prices, robust retail sales data – the list of evidence that the US economy is steaming and that inflation will remain a problem has become long and varied. On Tuesday, Fed Chairman Jerome Powell only reinforced that point when he confirmed what many forecasters had expected: rate cuts won’t come anytime soon.
“At this time, given the strength of the labor market and progress on inflation to date, it is appropriate to give restrictive policies more time to work,” Powell said at a policy forum on economic relations between Canada and USA in Washington, DC. Inflation will continue and the Fed will “maintain current levels.” [interest rates] as long as necessary.”
The comments come after the latest Consumer Price Index report showed annual inflation rose for the third month in a row in March to 3.5%. That’s well below the June 2022 peak of 9.1%, but still lower than the June 2023 most recent low of just 3%, and far from the Fed’s 2% target.
Powell noted that recent data shows a clear “lack of progress” in curbing inflation, meaning it will take longer than expected before Fed officials can feel confident they can cut rates without restarting the economy to warm up. Quincy Krosby, chief strategist at LPL Financial, said Fortune via email that Powell’s comments “underscore that the downward trajectory of inflation has essentially stalled.”
“Moreover, he made clear – rather than his more ambiguous stance on a timetable for rate easing – that the ‘higher for longer’ narrative remains intact,” she said. “This was unkind to the stock markets, but the markets got the message.”
Still, Powell’s new tone wasn’t exactly surprising, given the messaging from his fellow Fed officials in recent weeks following several hot inflation reports at the start of the year. After predicting three more rate cuts last month, Fed officials appear to be suddenly turning aggressive.
In late March, Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC) that sets interest rates, said he had “recalibrated” his interest rate outlook because of data showing economic strength and persistent inflation. Bostic now expects only one rate cut in 2024, and not until the end of the year. And just this week, Federal Reserve Vice Chairman Philip Jefferson argued that interest rates will have to remain higher “for longer” than previously expected because the work to sustainably reduce inflation to 2% is “not yet done.”
The aggressive telegraphing of prominent Fed officials in recent weeks has led many Wall Street economists to argue that the most likely outcome for the US economy is now a “no landing” scenario – in which inflation remains a problem, but the economic growth is strong.
As Ed Yardeni, the veteran market watcher and founder of Yardeni Research, explained in a Tuesday note: Consumers continue to spend as disposable incomes rise; immigration creates even more expenses; and rising oil prices are convincing investors that inflation may be difficult to control.
“That is neither a hard nor a soft landing,” he argued. “The US economy is refusing to settle…consumers didn’t get the recession memo.”
This story originally appeared on Fortune.com
