The Federal Reserve, to hear Chair Jerome Powell tell it, is in no hurry to slice interest rates further because inflation remains stubbornly above 3%. If U.S. inflation (now 3.5%) stays stuck, he said in a public appearance Tuesday, then the Fed can keep rates steady for “as long as needed.”
The result of keeping them stable may be that other nations’ central banks will trim their rates in the near future, going lower than the Fed, according to a Ned Davis Research report. Right now, the Fed’s benchmark rate is in a band from 5.25% to 5.5%. The Bank of England’s rate is lower, at 5.2% (inflation: 3.1%) and the European Central Bank’s rate is at 4.5% (inflation: 2.4%).
If the other banks act first, that would be a switch. The Fed has initiated almost all rate reduction cycles since the early 1980s, except for in 1998, Davis’ chief economist, Alejandra Grindal, and senior analyst, Patrick Ayers, wrote.
For investors, the report noted, the good news is that stocks globally, as measured by the MSCI World Index, have risen in the past after a cut, regardless of whether the Fed did it or another central bank.
Once the Fed starts cutting, the dollar tends to fall, the Davis paper pointed out, as U.S. fixed-income securities are not as attractive due to their shrunken yields. A dollar decline also tends to occur once a worldwide reduction cycle is under way.
Fed hesitancy is not good for equities, opined Jeffrey Roach, chief economist for LPL Financial, in a research note after Powell’s remarks made at a panel discussion in Washington D.C.: “Investors are reassessing risk appetite as Chair Powell is not confident that inflation is cooling enough for rate cuts.”
Indeed, the stock market has reacted poorly to the seeming plateau for inflation: The S&P 500, rallying starting in late October, has fallen 3% since the Consumer Price Index report’s release April 10.
Inflation has declined dramatically since mid-2022, when the CPI reached just under 9% annually. But since last fall, CPI progress has stalled, with the most recent reading at 3.5% for the 12 months through March.
The futures markets, which once expected several quarter-point cuts in 2024, now believes only one or two will appear late in the year. The Federal Open Market Committee, the Fed’s policymaking arm, next meets April 30-May 1.
Tags: Bank of England, CPI, European Central Bank, fed funds rate, Federal Reserve, futures market, Inflation, Jerome Powell, Stocks