How Jay Powell and the Fed are back on the rise for longer

For months, Federal Reserve Chair Jay Powell has offered assurances about interest rate cuts in 2024, arguing that hotter-than-expected inflation reports were all part of a “bumpy” road to meeting the Fed's target.

Last week, those assurances disappeared.

“Clearly, the latest data has not given us greater confidence, and instead suggests that it will likely take longer than expected to achieve that confidence,” he said Tuesday while speaking at an event in Washington, D.C.

Powell's message was clear: interest rates will remain higher than expected for longer.

He was not the only important voice at the Fed to make such a shift last week.

Three other Fed officials also took a tougher stance due to hotter-than-expected inflation data in the first quarter.

Among them was Chicago Fed President Austin Goolsbee, one of the most pessimistic members of the Fed.

Goolsbee, known for his previous view that the Fed is on a “golden path” to lowering inflation without rising unemployment, acknowledged Friday that “progress on inflation has stalled” and that “it now makes sense to wait” before cutting interest rates.

Another change came from New York Fed President John Williams, who said on Thursday that he saw no “urgency” to cut interest rates and did not rule out raising them if inflation rose further.

This warning came just four days after Williams said in a television interview that interest rate cuts were “likely” to begin this year.

“Facilitation bias” evaporates

The shift by several of the Fed's most influential figures has sparked a new debate on Wall Street about how the rest of 2024 could play out.

“The accommodative bias that a lot of people expected earlier in the year appears to be evaporating very quickly,” Jerome Schneider, head of short-term portfolio management at Pimco, told Yahoo Finance.

Traders are now betting that the first rate cut will not come until September, rather than June or July, and are now pricing in just one or two cuts instead of the six expected at the start of 2024.

Read more: What the Fed's interest rate decision means for bank accounts, CDs, loans and credit cards

But a cut in September could also expose the Fed to criticism that it acted too close to the presidential election in November.

Consequently, Blake Gowen, head of US interest rate strategy at RBC Capital Markets, now expects one cut in December after cutting his forecast from three to just one in 2024.

He told Yahoo Finance that Powell's comments this week reinforced the shift already underway among other members of the Fed's Federal Open Market Committee.

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“Some of the other centrist-type members, and even some of the people who tend to lean dovish, you see them kind of backing away from this bump in the road where they were trying to kind of write off the January election,” Gwin said. “Strength and inflation are special.”

One such voice is San Francisco Fed President Mary Daly, who was anticipating three rate cuts in 2024, but said during an April 12 speech that “there is absolutely no urgency in my mind for a rate adjustment.”

“I need to be pretty confident that it's on track to get down to 2%… before we think about a rate cut,” Daly added.

Another official who pushed back on expectations about the timing of rate cuts this week is Cleveland Fed President Loretta Mester.

She said Wednesday that inflation rose higher than expected this year and that the central bank did not need to “rush” to cut interest rates. Meester had previously said she expected to cut interest rates three times later this year.

The shift from these Fed officials came after another hotter-than-expected inflation reading for March.

The Consumer Price Index (CPI) rose 3.5% from a year earlier in March, an acceleration from the 3.2% annual price increase in February and more than economists had expected.

The year-on-year change in the so-called core CPI – which excludes volatile food and energy prices – was 3.8%, the same level as in February but a tenth of a percent higher than expected.

The Fed has tended to look at its core measure of the CPI, which is now nearly double the central bank's 2% inflation target.

Powell axis

What may have been the final straw for Powell, however, was an early estimate of where the Fed's preferred measure of inflation, the personal consumption expenditures (PCE) index, might be headed.

Last week offered a preview of the March numbers, which will be released next Friday. He didn't look pleased.

The February year-over-year change in “core” personal consumption expenditures — which excludes volatile food and energy prices — was 2.8%. That was in line with economists' expectations and down from 2.9% in January.

Powell seemed somewhat encouraged by this reading when he spoke on March 29, saying it was “consistent with what we want to see” while sticking to his assertion that inflation remains on a “bumpy road” toward the central bank’s goal of lower inflation. 2%.

But Powell said last week that he expected the personal consumption expenditures reading for March to change slightly from February. He said that the three- and six-month readings would be higher than this level.

Powell will not be able to comment on the numbers on Friday because the Fed will be in a blackout period leading up to its next policy meeting from April 30 to May 1.

“It is appropriate to allow restrictive policy more time to work and to allow evolving data and forecasts to guide us,” he said last Wednesday.

Not everyone on Wall Street is willing to lower interest rate cut expectations, despite Powell's apparent pivot.

Robert Sokin, chief global economist at Citi, stands by his call for a June cut. He admitted that the latest inflation data “came much stronger than expected.”

But he said: “We still think there will be enough progress on inflation by the time we get to the June meeting that there will be enough evidence that the Fed is ready to start this easing cycle.”

“Ultimately, it will all depend on where inflation lands,” Dave Mazza, CEO of Roundhill Investments, explained to Yahoo Finance.

“Now, this picture does not look positive.”

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