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Fed expects to make three rate cuts this year, says Powell

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The Federal Reserve’s rate-setters still expect to make around three quarter-point rate cuts this year, its chair Jay Powell said in an interview that aired on Sunday.

Powell told CBS’s 60 Minutes show that “almost all” of the membership of the Federal Open Market Committee think the US central bank will cut rates from their current 23-year high of 5.25-5.5 per cent at some point over the course of 2024.

Rate-setters, on average, expected to make 75 basis points of cuts back in December. Powell said in an interview recorded on Thursday that, while new projections were not due out until March 20, “nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts.”

“If the economy were to weaken, then we could reduce rates earlier and perhaps faster,” he said. “If the economy were to prove — if inflation were to prove more persistent, that could call for us to reduce rates later and perhaps slower.”

Markets had been betting on six cuts, beginning in March. But Powell’s insistence last week that such an early move was unlikely, and a strong January jobs report, quashed hopes of a move that early in the spring.

Powell’s interview took place a day before non-farm payrolls figures showed the economy added 353,000 jobs — almost twice what economists had forecast. 

The Fed chair said ahead of their publication that the US labour market was moving into better “balance”. 

“The labour market is very, very strong still,” Powell told the show. “So really the kind of pain that I was worried about and so many others were, we haven’t had that. And that’s a really good thing. And, you know, we want that to continue.”

Other Fed officials have raised concerns that the strength of the labour market could lead to higher wage growth and higher prices for services, complicating the central bank’s task of bringing inflation down to their 2 per cent goal. 

Powell said his “base case” was that inflation would continue to fall over the first six months of this year. “We look at inflation over a 12-month basis. That’s our target. And the first five months of last year were fairly high readings,” he said, indicating that those lower readings would pave the way for cuts around the middle of the year. 

Inflation was falling as chinks in supply chains unwound and the impact of the Fed’s rate rises took hold. The US central bank increased borrowing costs by 525 basis points in just 18 months after inflation surged to its highest level in decades.

Powell said it was “historically unusual” that those increases in interest rates had not triggered a sharper slowdown in the economy or in the jobs market. 

“The broader situation is that the economy is strong, the labour market is strong, and inflation is coming down,” Powell said. “My colleagues and I are trying to pick the right point at which to begin to dial back our restrictive policy stance. That time is coming.”  

  

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