Nick Timiraos, a prominent journalist known as the 'Federal Reserve's megaphone' (Wall Street Journal), published his latest article following the January Federal Reserve rate decision, providing a routine interpretation of the decision. The full content is as follows.
The Federal Reserve hit the pause button on rate cuts at its recent policy meeting, entering a new wait-and-see phase, which drew criticism from President Trump. The Federal Reserve is trying to decide whether and by how much to further lower rates from a 20-year high.
On Wednesday, Eastern Time, the Federal Reserve decided to maintain the benchmark federal funds rate in the current range of around 4.3%, following three consecutive rate cuts that began last September when rates were about 5.3%.
Federal Reserve Chairman Powell stated at the post-meeting press conference that, due to the current rates being "significantly more restrictive than before last year's rate cuts," "we do not need to rush to adjust our policy stance."
These comments suggest that the Federal Reserve may remain on hold at its next meeting in mid-March. Powell stated that the Federal Reserve needs to see "true progress on inflation" or unexpected weakness in the labor market before considering further rate cuts.
After Powell's speech, Trump criticized the Federal Reserve and its leaders for allowing inflation to accelerate four years ago and promised to curb rising prices. "I will do this by unleashing American energy, cutting regulations, rebalancing international trade, and reigniting American manufacturing," he said in a post on his social media site.
Earlier, Powell declined to respond to Trump's comments from last week when Trump stated that once inflation is under control, he would ask for rate cuts. Powell said the Federal Reserve would make decisions solely based on fair analysis of economic data.
"As I have said countless times over the years, this is where we stand on our job responsibilities and do our jobs well," Powell said. "Don't expect us to do anything else."
U.S. stocks fell on Wednesday, continuing to decline after the Federal Reserve announced its rate decision. The 10-year U.S. Treasury yield changed little, rising slightly from 4.548% on Tuesday to 4.554%.
Powell expressed optimism that inflation will continue to slow in the coming months but stated that officials want to see their predictions of sustained cooling of price pressures come true before lowering rates. He said, "We seem to be prepared for further progress on inflation." Being prepared for progress is one thing, "but getting such results is another."
In the forecasts released at last month's meeting, most officials indicated that they expect the Federal Reserve to continue cutting rates over the next year, but they are uncertain about how many times they will cut. Most of them expect two cuts this year, down from four projected in September last year, provided that progress in reducing inflation continues.
Richard Clarida, who served as Powell's deputy from 2018 to 2022, said: "The goal of the December meeting was to gain options by 2025, to either do very little or nothing at all, and they achieved that."
Federal Reserve officials face two major questions in the coming weeks and months. First, will inflation reach the Federal Reserve's 2% target in the next year or two as officials expect? Second, to what extent have interest rates and broader financial conditions suppressed economic activity? The minutes from the Federal Reserve's last meeting, released earlier this month, stated that the vast majority of officials still believe that their policy stance at the time was "meaningfully restrictive."
Clarida, now a senior advisor at bond giant Pacific Investment Management Company (Pimco), believes that if economic activity remains strong, the Federal Reserve may face two scenarios this year. In one scenario, the Federal Reserve may cut rates as early as spring as inflation continues to approach the 2% target. In another scenario, the Federal Reserve may not adjust rates at all as inflation appears stickier than expected.
"They are feeling their way forward," said Nathan Sheets, chief economist at Citigroup.
The Federal Reserve needs to balance its dual mandate.
As of last November, a widely watched so-called core inflation indicator—the year-on-year growth of core PCE excluding volatile food and energy prices—stood at 2.8%, and a report updated on Friday may show that the indicator remained stagnant at the same level last month.
Hitz stated that while a rate cut by the Federal Reserve at the next meeting in March seems unlikely, a May rate cut would be reasonable if inflation continues to improve and economic activity is moderate enough to indicate that interest rates are actually cooling growth.
Federal Reserve officials have been working to strike a balance between inflation and employment. With price and wage growth already cooling, they aim to prevent previous aggressive rate hikes from causing unnecessary drag on economic activity, while also not wanting to erase recent progress made on inflation.
When the COVID-19 pandemic broke out nearly five years ago, the Federal Reserve cut rates to near zero and kept them there until 2022. Since then, they have raised rates at the fastest pace in 40 years to combat inflation, which also soared to a 40-year high. They stopped raising rates in mid-2023 and kept rates steady for more than a year after inflation cooled. In September last year, the Federal Reserve began a rate-cutting cycle due to concerns about an unwelcome slowdown in the labor market.
Short-term rates are very sensitive to the Federal Reserve's actions. However, broader market forces, including investors' expectations for growth and inflation, will influence long-term rates such as mortgages.
The market's reaction to the Federal Reserve's rate cut last year powerfully illustrates this dynamic. Despite the Federal Reserve cutting rates, long-term rates still rose—30-year mortgage rates briefly exceeded 7% this month, as brighter growth prospects led investors to lower their expectations for rate cuts.
Although the spread between government debt and many types of private credit has narrowed after the Federal Reserve's rate cuts, investors in real estate and other interest rate-sensitive markets have not enjoyed the returns they expected due to the rise in the 10-year U.S. Treasury yield.
For many investors, "current rates are distressingly high," said Marcus Frampton, chief investment officer of the Alaska Permanent Fund, a state-owned investment institution with $78 billion in assets. "If (long-term) rates do not come down from current levels, it will bring real pain."
Frampton expressed concern about stocks that are historically high in valuation compared to earnings, sales, or net worth. He said, "I think there are a lot of people worried about tariffs, worried about unconventional policies from Washington, and what that might mean for the very expensive stock market."
Article forwarded from: Jin Shi Data