Stocks wobbled after Powell warned that rate cuts were likely to come later than expected

Stocks wobbled after Powell warned that rate cuts were likely to come later than expected

US stocks faltered on Tuesday after Federal Reserve Chairman Jerome Powell said a “lack of further progress” on inflation meant the central bank was unlikely to cut interest rates at its next policy meeting just two weeks away, keeping them higher for longer.

Stocks seesawed after Powell’s comments, closing mixed Tuesday. The Dow rose 64 points, or 0.2%. The S&P 500 fell 0.2% and the Nasdaq Composite lost 0.1%.

Meanwhile, the 2-year Treasury yield topped 5% on Tuesday before retreating below that threshold to about 4.96%.

“The latest data obviously doesn’t give us any greater confidence” that inflation is heading toward the central bank’s 2% goal, Powell said during a moderated discussion hosted by the Wilson Center. Instead, he said, there are signs “it may take longer than expected to achieve that confidence.”

“At this time, given the strength of the labor market and the progress of inflation so far, it is appropriate to allow restrictive policy longer to work and let the evolving data and outlook guide us,” the Fed chief said. Interest rates are currently set at a 23-year high after the Fed launched an aggressive rate hike campaign two years ago. Inflation is down significantly from the four-decade peak reached in the summer of 2022, but recent inflation reports have pointed to continued price pressures in services and housing.

Higher borrowing costs, coupled with high prices for essential goods, have forced many Americans to downsize. And while the US economy and job market remain strong, higher mortgage rates have hampered the housing market.

But the latest retail sales report showed that consumers continued to spend last month, and marked the latest evidence that the economy remains strong, leaving the Fed in no rush to cut rates.

The central bank usually cuts rates when the economy weakens sharply because it is also mandated by Congress to achieve maximum employment, in addition to stable prices. Currently there are no signs of the job market deteriorating.

“Fed Chairman Powell moved more clearly in a hawkish direction as he essentially emphasized that the downward trajectory of inflation has essentially stalled,” Quincy Krosby, head of global strategy at LPL Financial, said in a note Tuesday.

Prevents the progress of inflation
Powell’s comments on Tuesday were not a surprise and they largely echoed what other Fed officials have said in recent speeches, which is that the Fed is not considering cutting rates yet.

But the Fed chief’s statement that there was no “further progress” on inflation was a pivot from his comments last month that recent inflation reports may have been stronger than expected simply due to “seasonal fluctuations.”

Consumer prices rose 3.5% in March from a year earlier, according to the latest Consumer Price Index, a big improvement from a 3.2% rise in February and more than what economists in a FactSet survey had estimated. It was the third month in a row that the CPI surprisingly rose.

The recent increase in gas prices has increased inflation overall, but the cost of protection and insurance has also increased. Consumer prices in the services sector have generally proven stubborn. The Fed’s favorite measure of inflation, the Personal Consumption Expenditure price index, also doesn’t give Fed officials much assurance that inflation is under control.

Continued robust economic growth can prevent inflation from drifting lower. It also remains to be seen whether productivity growth, which can help control inflation, will continue to rise as it did last year. The conventional wisdom is that if workers produce more with less, then the economy can continue to grow without triggering inflation or maintaining pressure on prices.

The Atlanta Fed now projects first-quarter gross domestic product to register at a robust 2.9% annualized rate.

First rate cut in summer?
Wall Street is already not betting on a rate cut in May, but some analysts estimate the first cut could happen in the summer. Analysts at Goldman Sachs, JPMorgan and Nomura estimate the first rate cut in July.

Once the Fed is convinced that inflation is heading toward 2%, it’s unclear whether the Fed will signal in a policy meeting that it plans to cut at the next meeting – and how it will do so. The Fed practices a concept known as “forward guidance,” which communicates to financial markets and other observers about its likely rate decisions.
Meanwhile, analysts at Wells Fargo, Bank of America, Barclays and Deutsche Bank now predict the first rate cut will happen after the summer, in December at the latest.

“My baseline outlook continues to indicate that inflation will continue to decline, with policy rates remaining steady at current levels, and the labor market will remain strong, with labor demand and supply continuing to rebalance,” Fed Vice Chairman Philip Jefferson said in remarks on Tuesday.

“Of course, the outlook remains somewhat uncertain, and if incoming data shows that inflation is more persistent than I currently expect, it would be appropriate to maintain the current policy stance for longer,” he added.

As the stock settles down after the trading day, levels may change slightly.