How Jay Powell and the Fed pivoted back to higher for longer

For months, Federal Reserve Chairman Jay Powell has offered assurances about rate cuts in 2024, arguing that reports of higher-than-expected inflation are all part of the “rocky” path to the Fed’s objective.

Last week, those assurances disappeared.

“Recent data has clearly not given us greater confidence and instead indicates that it will likely take longer than expected to achieve that confidence,” he said Tuesday in a speech at a event in Washington, DC.

Powell’s message was clear: rates will stay higher than expected for longer than expected.

Federal Reserve Chairman Jerome Powell participates in a Washington forum on the Canadian economy, with Tiff Macklem, Governor of the Bank of Canada, Wednesday, April 16, 2025, in Washington.  (AP Photo/Manuel Balce Ceneta)Federal Reserve Chairman Jerome Powell participates in a Washington forum on the Canadian economy, with Tiff Macklem, Governor of the Bank of Canada, Wednesday, April 16, 2025, in Washington.  (AP Photo/Manuel Balce Ceneta)

Federal Reserve Chairman Jerome Powell. (AP Photo/Manuel Balce Ceneta) (ASSOCIATED PRESS)

He is not the only prominent voice at the Fed to make such a change last week.

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

They included Chicago Fed President Austan Goolsbee, one of the Fed’s most dovish members.

Known for his previous view that the Fed was on a “golden path” to lowering inflation without high unemployment, Goolsbee acknowledged Friday that “progress on inflation has stalled” and that he is now “logical to wait” before reducing rates.

Another about-face came from New York Fed President John Williams, who said Thursday that he saw no “urgency” to cut rates and did not rule out raising them if the inflation was becoming more pronounced.

The warning came just four days after Williams said in a television interview that rate cuts would “probably” begin this year.

The evaporation of the “easing bias”

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

“The easing trend that many people expected at the start of the year seems to be evaporating quite quickly,” Jerome Schneider, Pimco’s head of short-term portfolio management, told Yahoo Finance.

Traders are now betting that the first rate cut will not come before September, instead of June or July, and are now only pricing in one or two cuts instead of the six planned for early 2024.

Learn more: What the Fed’s rate decision means for bank accounts, CDs, loans and credit cards

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

Thus, Blake Gwinn, head of US rates strategy at RBC Capital Markets, now expects a cut in December after reducing his expectations from three to just one in 2024.

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

“Some of the other more centrist members, and even some of the people who tend to be conciliatory, you see them sort of moving away from that bump in the road narrative where they were sort of trying to undo the month of January strength and inflation are idiosyncratic,” Gwinn said.

Mary Daly, President of the Federal Reserve Bank of San Francisco, poses at the bank's headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir.Mary Daly, President of the Federal Reserve Bank of San Francisco, poses at the bank's headquarters in San Francisco, California, U.S., July 16, 2019. REUTERS/Ann Saphir.

Mary Daly, president of the San Francisco Fed. REUTERS/Ann Saphir. (Reuters/Reuters)

One of those voices is that of San Francisco Fed President Mary Daly, who predicted three rate cuts in 2024 but said in an April 12 speech that “there is no In my opinion, there is absolutely no urgency to adjust the key rate.”

“I have to be fully convinced that the rate is on track to come down to 2% (…) before considering a rate cut,” added Mr. Daly.

Another official who lowered her expectations for the timing of rate cuts this week is Cleveland Fed President Loretta Mester.

She said Wednesday that inflation was higher than expected this year and that the central bank did not need to be “pressured” to cut rates. Mester previously said she planned to cut rates three times later this year.

The change by these Fed officials came after another higher-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 what the economists were waiting.

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 percent more than expected.

The Fed tends to focus on the core CPI measure, which is now nearly double the central bank’s 2% inflation target.

Powell’s Pivot

What may have been the final straw for Powell, however, was an early guess at where the Fed’s favorite inflation gauge, the Spending Index, might be headed. personal consumption (PCE).

Last week he offered a preview of the March figures which will be released next Friday. And he didn’t look happy.

The year-over-year change in “core” PCE in February – which excludes volatility in food and energy prices – stood at 2.8%. This result 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 “in line with what we want to see” while sticking to the assertion that inflation was still on a “bumpy road” towards the central bank’s 2% target.

But last week, Powell said he expected March’s PCE figure to be little changed from February. And the three- and six-month numbers will be above that level, he said.

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

“It is appropriate to allow more time for restrictive policy to act and to let ourselves be guided by the data and the evolving outlook,” he said last Wednesday.

Not everyone on Wall Street is ready to lower their rate cut expectations, despite Powell’s apparent shift.

Citi senior global economist Robert Sockin maintains his call for spending cuts in June. He acknowledged that recent inflation data “is much stronger than expected.”

But he added: “We still think inflation will have risen enough by the June meeting that there will be enough evidence that the Fed is ready to begin this easing cycle.”

Roundhill Investments CEO Dave Mazza noted to Yahoo Finance that “ultimately it will all depend on where inflation lands.”

“And right now, that picture doesn’t look positive.”

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Sara Adm

Aimant les mots, Sara Smith a commencé à écrire dès son plus jeune âge. En tant qu'éditeur en chef de son journal scolaire, il met en valeur ses compétences en racontant des récits impactants. Smith a ensuite étudié le journalisme à l'université Columbia, où il est diplômé en tête de sa classe. Après avoir étudié au New York Times, Sara décroche un poste de journaliste de nouvelles. Depuis dix ans, il a couvert des événements majeurs tels que les élections présidentielles et les catastrophes naturelles. Il a été acclamé pour sa capacité à créer des récits captivants qui capturent l'expérience humaine.
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