Powell Says He’ll Keep His Highness
Fed Chairman Jerome Powell just delivered a message to the audience in Amsterdam that sounded both strong and uneasy: the Fed is n’t anticipating any further rate reductions this year, but it is committed to maintaining interest rates at their highest levels in more than 20 years.
The Fed’s interest charges are unlikely to be cut this month, or even very soon, despite Powell’s dime’s depressing surface. The prices beast remains firmly wild, as yesterday’s producer price index ( PPI ) report bitterly illustrates with a 0.5 percent month- over- month rise, similar to a 6.4 percent annual rate and much hotter than anticipated.
However, Powell also resolutely resists the idea that the Fed’s following move may be a climb rather than a slice.
The Block Away from Bruid Cuts
Powell’s shift in tone is telling. A cautious approach has taken his place in his when enthralling confidence in a near-term prices decline. He said,” We’re just going to have to see where the prices data fall out,” which he said has a sense of patience and resignation.
Fed officers were ecstatic as the year began. In late 2023, a few positive prices reports gave the nation hope that their prices dragon would subside sooner than later. It appeared believable that a few more positive months of data would help them achieve their goal of reducing rates by two percent. However, the Fed had to edit the text and update the storyline for this year after a string of worse-than-expected inflation reports released in the first three weeks of this year.
” We did not expect this to be a smooth highway, but these were higher than I think anybody expected“, Powell admitted.
Powell insisted that interest levels are” by some, many methods” sufficiently large to decrease desire, but there’s very little evidence that this is really happening. Consumer spending is still strong, and the economy’s growth and unemployment rate are both consistent with expectations. Home prices are rising. The stock market increased 10 % in the first five months of the year thanks to higher corporate earnings than expected. The moon is once more a meme stock.
Even Axios has taken notice, writing:” The fact that the ultra- speculative vibes are back raises questions about whether the Fed’s policies are cooling down financial conditions— and, by extension, inflationary pressure — as much as advertised”.
On May 14, 2024, New York City’s stock exchange employees walk the floor. ( Spencer Platt/Getty Images )
Powell echoed the sentiment that the majority of Fed officials do n’t believe there will be more rate increases. According to Powell,” I have stated that I do n’t believe that the next step that we make would be a rate increase,” he said on Tuesday.
The data tells a different story. Over the past six months, the index of core personal consumption expenditure prices increased by a significant 3.0 percent annually over the previous six months, a significant increase from the previous six-month average of 1.9 percent.
The upcoming Labor Department’s consumer price index ( CPI ) report for April will be crucial. Wall Street expects both headline and core CPI to rise 0.3 percent, a decline from the prior month’s 0.4 percent increase. Given the sharp rise in gasoline prices in April and today’s PPI report, with its unexpected 0.5 percent month- over- month rise, that may turn out to be too optimistic. The Cleveland Fed’s nowcast has headline CPI rising 0.4 percent.
The Fed Triggered Inflation’s Resurgence
The Fed’s own forecasts may be to blame for the sleeping dragon’s return. In a recent piece for Fox Business, Key Square Group founder Scott Bessent argues that Powell’s premature pivot towards lowering interest rates, which he likens to failing a” Marshmallow Test” of delayed gratification, led to an easing of financial conditions, triggering a resurgence in inflation.
The economy could have slowed sufficiently to allow actual rate cuts in the upcoming month, Bessent writes,” If only Powell had abstained from signaling rate cuts in December and stuck to the” higher for longer “script.”
We’ve made this point before at Breitbart Business Digest, and we want to make it even more important: efforts to tighten financial conditions have likely been undermined by Fed officials ‘ consistently projected return to 2.5 percent or so. Due to the promise that rates will drop and that the current high of 0 % is temporary, debt issued today will be refinanced at a lower rate in the not-to-distant future. If a company looked at the average cost of debt over the course of a project’s life and assessed the average debt cost, it would be more likely than it would if its managers had predicted rates might increase or were unsure of the project’s future.
Powell’s insistence that we’re already at the top of rates has a similar effect. Because everyone from corporate treasurers to home buyers have been taught that rates are only going to go down from here, allowing any bonds issued or mortgages to be refinanced at a lower rate tomorrow, it encourages economic activity and debt-fueled expansion.
Ironically, by insisting that he does n’t anticipate a hike, Powell could be making a hike more likely. Financial conditions might become too tight for a rate hike if Powell even made an implied suggestion that it was actually possible.
