Powell Hints at Cautious Fed, Rate Cuts Possible Later in 2023

Fed's Powell signals patience on rate cuts amid inflation uncertainty, with markets and gold prices reacting to future policy expectations.

By Athena Xu

4/3, 14:00 EDT
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Key Takeaway

  • Fed Chair Powell indicates a cautious approach to rate cuts, awaiting more data to confirm inflation trends towards the 2% target.
  • Despite recent inflation spikes, Powell suggests it's too early for policy adjustments, with potential rate reductions later this year.
  • Market reactions include Treasury yield adjustments and stable S&P 500, with investors anticipating fewer than three rate cuts in 2023.

Fed Signals Patience on Rate Cuts

Federal Reserve Chair Jerome Powell emphasized the need for clearer signs of declining inflation before considering interest rate reductions, despite a recent uptick in inflation figures. Powell highlighted that the recent data did not significantly alter the broader inflation trajectory, maintaining the stance that it might be appropriate to lower rates "at some point this year." The Fed's cautious approach comes amid a split among officials on the pace of potential rate cuts, with the central bank's latest meeting revealing a division on the aggressiveness of future rate reductions.

Inflation and Economic Growth Outlook

Recent government data showed a cooling in the Fed's preferred inflation measure, the core personal consumption expenditures price index, in February, following a significant increase in January. This mixed inflation data underscores the Fed's wait-and-see approach to rate cuts, as officials seek more evidence of a sustainable move towards their 2% inflation target. Despite this, the economy's strength and progress on inflation so far have allowed the Fed to let incoming data guide their policy decisions, with Powell indicating that most FOMC participants see it likely to begin lowering the policy rate later this year if the economy evolves as expected.

Market Reactions and Gold's Surge

Following Powell's remarks, Treasury yields saw a reversal or pared earlier gains, while the S&P 500 remained higher. The market's reaction reflects investors' anticipation of the Fed's future moves, with futures pricing suggesting even odds on an initial rate cut in June and a possibility of fewer than three reductions this year. In the commodities market, gold prices surged to a new record, nearing $2,300 an ounce, as Powell's speech bolstered expectations for eventual rate cuts, highlighting gold's appeal in a lower-rate environment.

Street Views

  • Kathy Bostjancic, Nationwide Mutual Insurance Co. (Neutral on the Federal Reserve's interest rate policy):

    "Powell still sounds dovish, since the jump in inflation earlier this year might be a blip rather than a new trend... His comments support our view that a June rate cut is on the table but we need to see softening in inflation readings starting with the March readings."

Management Quotes

  • Jerome Powell, Chair of the Federal Reserve:

    "On inflation, it is too soon to say whether the recent readings represent more than just a bump... We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2%." "Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy... If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year." "Our analysis is free from any personal or political bias, in service to the public... We will not always get it right — no one does. But our decisions will always reflect our painstaking assessment of what is best for our economy in the medium and longer term — and nothing else."