No rate hike in June, inflation a key concern for rate cuts: US Fed Chair

US Fed Meeting: Well, now all eyes are off Eccles Building, as the US Federal Reserve is done with its third Federal Market Committee with a volley of dovish signalling. Wall Street was expecting more of a hawkish message in the presser followed by the FOMC meeting. With more dovish undertones, US Fed Chair Powell has kept the Fed fund rate at 5.25 per cent to 5.50 per cent, the highest in the last 22 years. The inflation has eased from a peak level of 7.1 per cent in 2021 to 2.7 per cent in March 2024. The Fed has hiked the interest rate almost 11 times ever from its zero levels.

Inflation still a concern

But despite substantial moderation in inflation from peak levels, the progress in taming inflation has not been satisfactory, at least post-meeting commentary from Powell indicates the same. Powell while shedding light on inflation said that inflation was “still too high” and any decision on rate cut would be taken only after “greater confidence” is achieved on the progress on the inflation front as the target is to bring down inflation under 2 per cent.

The Personal Consumption Expenditure, a key gauge for the US Fed to determine rate cuts stands at 2.8 per cent which strips out food and fuel.

“Gaining such greater confidence will likely take longer than expected,” Powell told a news conference after a two-day policy meeting ended. Powell added, “We are prepared to maintain the current target federal funds rate for as long as appropriate.”

“Inflation is still too high, further progress in bringing it down is not assured, and the path forward is uncertain,” he said. Powell said the rate cuts going forward would “depend on the data”.

Rate cuts/ rate cuts not

Not indicating any timeline for the rate cut to begin, Powell indicated that inflation is just a bump in the road, rather than taking the Fed to a different route. According to him, the inflation has just delayed the rate cuts but rate cuts eventually will come.

Earlier, when the US Fed had its last meeting, the DOT Plot showed the possibility of three rate cuts in 2024 but persistently stubborn inflation dashed the hope of rate cuts and also pushed the rate cuts to the end of this year. Some are even going to the extent of saying that there will be no rate cuts this year.

Powell alludes to stubbornly high inflation and said “There are paths to cutting and there are paths to not cutting, it is going to depend on the data.” The US Fed has clearly said that it's all upon inflation now and that will play a decisive role as far as rate cuts are concerned.

Stagflation or not

Clearing the fog around inflation, Powell said Stagflation in the past involved 10 per cent unemployment, high single-digit inflation and very slow growth.

“Right now we have 3 per cent growth, which is pretty solid growth,” Powell says. He added further and said, “I don’t see the stag or the inflation.”

No rate hike

Powell also provided forward guidance as far as a rate hike is concerned, he ruled out the possibility that the next policy move at its June meeting would be an interest rate hike. “I think it’s unlikely that the next policy rate move will be a hike. I’d say it’s unlikely,” Powell said.

“I think we’d need to see persuasive evidence that our policy stance is not sufficiently restrictive to bring inflation sustainably down to 2 per cent over time. That’s not what we think we’re seeing.”