- Jerome Powell hinted at further postponement of potential interest rate cuts this year.
- The latest pronouncement of the US Federal Reserve Bank Chair came amidst the move of inflation figures farther away from their 2% target.
Unlikely Interest Rate Cuts on the Short Run
The long wait for an interest rate cut may continue as the recent statement of Federal Reserve Chair Jerome Powell suggested more delays coming up. In a speech at the policy forum on US-Canada economic relations on Tuesday, the central bank head admitted that while inflation seems to be slowing, its pace is not as quick as anticipated. Favorable employment data in March also support the lack of urgency for rate cuts.
“More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal,” he explained during a panel discussion.
Hopes for the likelihood of interest rate cuts by June were dashed by the Consumer Price Index (CPI) report of the Bureau of Labor and Statistics (BLS) covering March 2024. Based on the tally, the year-over-year core inflation (excluding the volatile prices of food and energy) pumped 3.8% while headline inflation (including food and energy) was somehow tamed at 3.5%.
The core inflation figures saw a rise of 0.6% from February but headline inflation slowed by 0.3% within the same period. Meanwhile, the unemployment rate showed a slight progress from February’s 3.9% to March’s 3.8%.
“The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Powell added in a sober note. “That said, we think policy is well positioned to handle the risks that we face.”
The Fed has been stuck with the 5.25%-5.5% interest rates since July last year. So far, that’s the highest the central bank has imposed in the past 23 years. Nevertheless, Powell remains unfazed about reaching the 2% target before turning down the dial on the rates.
The Magical 2% Basis
Powell has been steadfast on his 2% target, but what’s the actual basis for his magical number?
According to Time, the Fed’s sacred number was based on a rather outdated and problematic benchmark cooked up in New Zealand in the 1990s and was later adopted by the US in 2012 by then-Chair Ben Bernanke.
Over time, analysts and even the Reserve Bank of Australia (RBA) pointed out several flaws in this assumption due to its “extremely shaky foundations” that could “lead to serious policy errors.”