Fed Chair Powell tempers market excitement: ‘We want to gain further confidence’ on inflation

Fed Chair Powell tempers market excitement: 'We want to gain further confidence' on inflation

Fed Chair Powell tempers market excitement: ‘We want to gain further confidence’ on inflation

Chairman of the Federal Reserve Jerome Powell reiterated during his press conference in June that policymakers want to gain further confidence on inflation before considering cutting interest rates, slightly dampening market enthusiasm fueled by a lower-than-expected inflation report , published earlier Wednesday.

So far this year, the data hasn’t given us that much confidence. Inflation data taken earlier this year were higher than expected, although the most recent monthly readings have eased somewhat, Powell said.

Powell welcomed today’s reading but warned that future inflation data could be good, but not [as] large as the latter, given the unfavorable base effects from the second half of 2023, which are likely to weigh on annual readings.

Powell somewhat invited investor excitement during today’s reading: This is a step in the right direction. But a reading is just a reading.

Read also: Fed keeps rates steady: forecasts show fewer rate cuts, higher inflation outlook

The May inflation report did not change the Fed’s new inflation outlook

Powell explained that members of the Federal Open Market Committee (FOMC) had the opportunity to update their inflation forecasts in the Summary of Economic Projections (SEP) after new May inflation data was released this morning. However, the SEP result is likely to show that most members generally left their opinions unchanged.

Average projected headline Personal Consumption Expenditure (PCE) inflation for this year rose to 2.6%, up from 2.4% in March. The projection for the coming years has also increased, now estimated at 2.3%, from 2.2% in March. The projection for 2026 remains unchanged at 2.0%.

According to Powell, conditions in the labor market have returned to a better balance than where they were on the eve of the pandemic, relatively tight but not overheated.

When asked if a September rate cut is feasible given the prospect of only one rate cut in 2024 (as shown in the SEP), Powell stressed that any decision will depend on the data, as the Fed does not make decisions on future meetings until they have all the necessary information.

Powell reiterated: We do not see ourselves as having the confidence that would require policy easing, stressing the need to see further positive inflation data in the coming months.

The Fed chairman also hinted that a sudden weakening in the labor market would also encourage the Federal Reserve to cut interest rates.

We don’t want to wait for things to break and then fix them, Powell said, indicating that the Fed will be very attentive in monitoring the evolution of labor market data.

Market reactions

Stocks narrowly trimmed their gains in the session, while Treasury yields recovered from sharp declines experienced earlier in the day, triggered by the May inflation report.

Implied market expectations for a September rate cut eased slightly from around 70% to 63%. Traders continue to expect two full-price rate cuts by December 2024.

The S&P 500 Index, tracked by SPDR S&P 500 ETF Trust (NYSE:SPY) was 0.8% higher at 3:30 PM ET, easing after hitting all-time highs earlier in the day.

The tech-heavy Nasdaq 100, tracked by Invesco QQQ Trust (NASDAQ:QQQ) was 1.1% higher, paring gains after being 1.9% higher at 3:15 pm ET.

The yield on a 2-year Treasury note traded at 4.76%, recovering after hitting an intraday high of 4.67%.

The yield on a 10-year Treasury note was 4.32%, up from an intraday low of 4.25%.

Gold, as tracked by SPDR Gold Trust (NYSE:GLD), erased all of the session’s gains, trading flat for the day.

Read now: How Slowing Inflation Could Affect the Fed’s Next Move: Insights from 6 Economists

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