Despite Federal Reserve Chairman Jerome Powell’s statement on the low probability of the next interest rate hike and the greater possibility of future rate cuts, journalist Nick Timiraos, known as the “Fed megaphone,” wrote that no matter what Powell says, it is the inflation data that will determine whether the Fed will restart rate hikes or when rate cuts will occur.
After a two-day policy meeting, the Federal Reserve decided to keep the federal funds rate unchanged at 5.25-5.5% this morning, which was in line with market expectations. Fed Chairman Jerome Powell released dovish remarks after the meeting, emphasizing that there is currently no expectation of a rate hike and that they will slow down quantitative tightening in June.
However, in an article by Wall Street Journal journalist Nick Timiraos, who is known as the “Fed megaphone,” he pointed out that a series of disappointing price and wage data has led investors to pay less attention to the Fed’s outlook and instead focus more on economic data. Neil Dutta, Head of Economic Research at Renaissance Macro Research, stated that if inflation data continues to rise, the Fed may need to reverse its dovish stance and open the door for rate hikes. Assuming that the Fed cannot make further progress on inflation issues, at some point they will say “we don’t know where rates are going.”
William English, a former senior advisor to the Fed, believes that although he does not lean towards the Fed raising rates currently, there is indeed the possibility of the next step being a rate hike. Although Powell stated during the press conference after the meeting that a rate hike is unlikely, he did not rule out this possibility.
The article mentioned that there are two factions within the Fed. One faction is concerned that keeping rates at a high level for too long in the face of slowing inflation and wage growth will put more pressure on regional banks, commercial real estate investors, and other industries. The other faction believes that due to strong economic performance, there is almost no need for rate cuts this year. They are concerned that if the Fed sets its inflation target at 2%, the inflation rate may stay far above 2.5%. Before considering rate cuts, they hope to see more evidence of an economic slowdown, and recent data supports this viewpoint.
Some are concerned that rate-sensitive areas of the economy, such as real estate and manufacturing, may have already felt the impact of the Fed’s rate policies, leading to tight labor markets and the risk of further economic growth and inflation. If inflation remains around 3%, the Fed may face more difficult challenges. Diane Swonk, Chief Economist at KPMG, stated that she expects some Fed officials to suggest the possibility of continuing tightening policies in this scenario, although this is not what Powell wants.