US FED RATE: POWELL’S MESSAGE TO THE MARKET IS CRYSTAL CLEAR
US Federal Reserve chair Jay Powell in a panel discussion alongside Bank of Canada Governor Tiff Macklem at the Wilson Center in Washington sent a clear message to the markets. Powell conveyed that it will probably take “longer than expected” for inflation to reach the central bank’s target of 2% to support interest rate cuts.
The federal funds rate stands at a 23-year high of 5.25-5.5 per cent and the timing of the first rate cut remains a topic of debate amidst sticky inflation. The US CPI data for March came in higher and even the PPI and PCE numbers are not favouring Fed’s attempt to cut rate.
Currently, investors predict that September will see the first rate cut, with a growing minority predicting that this year will see one or fewer cuts.
Markets, meanwhile, appear weaker even as equity and bond bulls alike try to hold on. Top of mind for stock traders is whether the S&P 500 Index can remain above the pivotal 5,000 level. The rate-sensitive, small-cap Russell 2000 is taking the most pain.
José Torres, Senior Economist at Interactive Brokers says, “Fixed-income instruments are getting pounded as investors think the worst is over in the Middle East for now, contributing to incrementally less demand for risk-off investments and lower oil prices.”
Here are some other opinions from market experts:
Jeffrey Roach, Chief Economist for LPL Financial
- The Fed will likely stay on hold for longer than originally planned.
- Supply constraints are still likely adding to inflation pressures and this dynamic makes it especially hard for the Fed.
- Strong retail sales and hawkish comments from Chair Powell are weighing on the bond market right now as investors grapple with a Fed on hold for most of this year.
Investors are reassessing risk appetite as Chair Powell is not confident that inflation is cooling enough for rate cuts.
The US dollar is still the global reserve currency, despite ballooning government debt.
Jamie Cox, Managing Partner for Harris Financial Group
- The Fed picked a bad time to have a communication problem on the path of rates this year.
- The Fed has a free pass to sit on rates longer while the labor market remains strong, consumption is unaffected, and the typical consequences of hiking rates quickly aren’t apparent in the economy.
- Markets need to focus on the fact that rates are sufficiently restrictive, instead of how many cuts are in the pipeline.
Quincy Krosby, Chief Global Strategist for LPL Financial
- Fed Chair Powell moved more decidedly in a hawkish direction as he essentially underscored that the downward trajectory of inflation has essentially stalled.
- Moreover, he made it clear – rather than his more ambiguous stance regarding a rate easing timetable – that the “higher for longer” narrative remains intact.
- This was unfriendly for equity markets, but markets got the message.
