Federal Reserve Chair Jerome Powell made it clear that the Fed will not cut interest rates again until inflation starts to cool. And this doesn’t even take into account the possible impact of the war in the Middle East.
At Wednesday’s press conference, Powell emphasized that it is still too early to assess the impact of the soaring oil prices on the US economy, although financial markets have been racing to factor in higher expected inflation over the next year into prices. Instead, he highlighted that price pressures had emerged even before the war broke out and have persisted longer than policymakers had anticipated.
Powell said, “What really matters this year is that we need to see progress on inflation. If we don’t see that progress, there won’t be any rate cuts.”
The comments made by the chair of the Federal Reserve after the second consecutive meeting where interest rates were held steady further reinforced the view that the Fed is still a long way from resuming the series of rate cuts it is set to implement starting at the end of 2025, as consumer price data has yet to materialize.
This trend has also raised concerns that the Fed’s next move could ultimately be to raise interest rates. Powell acknowledged that this possibility was again raised in the discussions this week – although he added that it was not the basic consideration of most policymakers.
The latest forecast released on Wednesday shows that officials maintained their expectation of one interest rate cut this year (based on the median forecast). But they also unexpectedly raised their economic growth forecast, suggesting that they are not currently concerned about the possible growth-dampening effect of rising energy costs.
At the same time, their inflation expectations have been revised upward, and Powell mainly attributed this to the ongoing impact of tariffs. He pointed out that the price pressure in the commodity categories most affected by tariffs has been particularly stubborn.
Powell said, “The question of whether to ignore energy inflation will only truly arise after we have confirmed it.”
Despite the sluggish recruitment situation raising concerns that the labor market might face more severe difficulties, the chairperson of the Federal Reserve remains optimistic about the labor market’s prospects. He pointed out that the unemployment rate has hardly changed since September.
Concerns over employment prompted the Federal Reserve to cut interest rates by 0.75 percentage points by the end of 2025. Most policymakers now believe that interest rates have reached a level that neither restrains nor boosts economic growth, and Powell said this is the “appropriate level” at present.
Priya Misra, a portfolio manager at JPMorgan Asset Management, said, “The market has been concerned about the growth and inflation risks brought by oil price shocks. The Federal Reserve seems to be more focused on inflation risks, perhaps because inflation data deviates more from its target than the unemployment rate.”
