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No clear signal on rate cut timing leaves markets uncertain

Well, he didn’t add more Kool-Aid to the punch bowl, but Fed Chair Jay Powell certainly didn’t give markets what they really desired: a clear statement on the timing of the first rate cut.

Wall Street reflected the uncertainty Powell left from his first day’s testimony to the US Congress (his regular start-of-the-year appearances). After an initial bounce, indexes faded over the day as the early strength drained away. Gold rose to new highs, and bond yields eased for a second day, but there was no ‘aha’ moment for markets.

With the second meeting of the central bank for the year on March 20, a dramatic change in policy on rates shouldn’t have been expected from Powell’s testimony, but the optimists and bulls demanded it — and were denied.

The next meeting will see the release of new forecasts and the famed ‘dot plot’ of interest rate projections by members of the Open Market Committee, which will be the way the central bank signals its views on the direction of rates.

So that’s why Powell really repeated what the Fed said in its last post-meeting statement and in his last media briefing — that he expects interest rates to start coming down this year but is not ready yet to say when.

In his prepared remarks for congressionally mandated appearances on Wednesday and Thursday, Powell said policymakers remain attentive to the risks that inflation poses and don’t want to ease up too quickly.

“In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks,” he said.

“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

That is, word for word, what the Fed said in its post-meeting statement at the end of January.

And during the question-and-answer session with House Financial Services Committee members, Powell repeated those sentiments, saying he needs to “see a little bit more data” before moving on rates.

“We think because of the strength in the economy and the strength in the labor market and the progress we’ve made, we can approach that step carefully and thoughtfully and with greater confidence,” he said. “When we reach that confidence, the expectation is we will do so sometime this year. We can then begin dialing back that restriction on our policy.”

Markets immediately took that as ‘here comes the Kool-Aid, off we go’, and the Dow was up 250 points around the middle of the session, but that drained away in afternoon trading, with the index up 34 points at 7:30 am Thursday, Sydney time.

The bottom line from his first appearance of the week was: no change in monetary policy or in the Fed’s economic outlook.

It did confirm, as has been clear now for a year or more, that the central bank is very reluctant to take any steps that might see the giving up of the gains made in lowering US inflation.

“We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in his opening comments. “But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.”

Some enthusiastic analysts reckon his comments mean a rate cut in June, but there was nothing of the sort in his remarks. A repeat of the mixed inflation figures for January would see more uncertainty next week when the CPI for last month is released next Tuesday.

A sharp fall, though, will push the central bank closer to a decision.