"Three Rate Cuts, Just a Forecast Not a Promise" Fed Becomes More Cautious

"I still think three rate cuts are reasonable, but it's a close call." (Loretta Mester, President of the Cleveland Federal Reserve Bank)

"Three rate cuts are a projection, not a promise." (Mary Daly, President of the San Francisco Federal Reserve Bank)

Federal Reserve (Fed) officials in the U.S., facing so-called 'last mile' risk?the final stretch before reaching their target?are continuously voicing cautious opinions about interest rate cuts. Jerome Powell, Fed Chair, is also scheduled to speak the following day.

[Image source=Reuters Yonhap News]

원본보기 아이콘

According to Bloomberg and other sources, President Mester stated on the 2nd (local time) at an event held by the Cleveland Fed that she ruled out the possibility of a rate cut in May. She said, "We need to confirm whether inflation indicators are stagnating in the disinflation process or if this is just a detour on the path downward," adding, "I do not expect to have enough information to make a rate cut decision by the next Federal Open Market Committee (FOMC) meeting (April 30?May 1)."

Classified as a hawkish (favoring monetary tightening) figure within the Fed, President Mester pointed out that "the bigger risk in monetary policy is cutting rates too quickly." Given that recent economic indicators have been stronger than expected, she explained the need to take time and carefully observe before deciding on a cut.

After the event, she told reporters, "I still think three cuts this year (as per the dot plot) are reasonable," but diagnosed that it is "a close call." She also raised the long-term neutral rate estimate from the previous 2.5% to 3%. However, she did not rule out the possibility of the first rate cut in June. President Mester, who holds voting rights at this year's FOMC, is scheduled to retire in June.

On the same day, President Daly also said, "Three rate cuts are a projection," and "a projection is not a promise." Attending an event in Nevada, she evaluated the Fed's existing dot plot, which forecasts three rate cuts this year, as "reasonable," but diagnosed that "growth is strong, so rate adjustments are not urgent." She emphasized, "Standing Pat is the right policy at this time." The poker term "Standing Pat" refers to taking no action or change in the current situation.

These remarks from Fed officials drew attention amid a stronger-than-expected economy, including a surprising rebound in manufacturing data the previous day. This week, key indicators closely watched by the Fed, such as employment data, are being released one after another. According to the Job Openings and Labor Turnover Survey (JOLTs) released by the Department of Labor on this day, job openings in February this year rose slightly to 8.76 million compared to the previous month, exceeding Wall Street expectations. Nancy Vanden Houten, an economist at Oxford Economics, described it as "data consistent with a still very robust labor market." Private employment data will be released the next day, and the nonfarm payroll report will be published on the 5th. The market currently expects nonfarm employment in March to have increased by about 215,000.

However, the market still predominantly expects the Fed to hold rates steady in May and then make the first cut in June. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures on this day reflected about a 64% probability that the Fed will cut rates by at least 0.25 percentage points at the June FOMC meeting. This expectation has slightly weakened compared to a week ago.

Bank of America (BoA) maintains its June rate cut scenario but expects "the Fed may only cut rates once or twice this year." It added, "If the next two core Personal Consumption Expenditures (PCE) price indices come out high, June could also be excluded from cuts." Upcoming inflation and employment data will be key in determining each step of future monetary policy.

The market's focus is on Chair Powell's remarks on the 3rd. Investors are expected to seek additional hints about the pace of rate cuts through his speech. Previously, after the release of the PCE data on March 29 that fueled last mile concerns, Powell's statement that "there is no need to rush rate cuts" caused the stock market to plunge. Besides Chair Powell, Michelle Bowman, Adriana Kugler, and Austin Goolsbee, President of the Chicago Fed, are also scheduled to speak.

© The Asia Business Daily(www.asiae.co.kr). All rights reserved.