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Jay Powell won’t give in to the market’s biggest fear: Morning Brief

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Jay Powell won't give in to the market's biggest fear: Morning Brief

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The Federal Reserve kept interest rates unchanged on Wednesday, keeping the fed funds rate at a 23-year high between 5.25% and 5.50% amid a “lack of further progress,” pushing inflation back toward the 2% target.

And while Fed Chairman Jerome Powell introduced a tougher assessment of inflation, he left little doubt during a news conference about the Fed’s most likely next move.

“It is unlikely that the next policy step will be a rate hike,” Powell said at a news conference.

In response, stocks initially rose and yields fell, as Powell largely took the market’s biggest fears off the table. Stocks ended the day largely where they were before the Fed meeting, as investors realized they already knew what Powell told them: Rate hikes are not being seriously considered by the Fed.

WASHINGTON, DC - MAY 1: Federal Reserve Bank Chairman Jerome Powell announces that interest rates will remain unchanged during a press conference at the bank's William McChesney Martin Building on May 1, 2024 in Washington, DC.  After the regular two-day meeting of the Federal Open Markets Committee, Powell said the U.S. economy continues to show momentum and inflation has remained high in recent months.  This formed the basis for the Fed's decision to maintain the current interest rate of 5.33 percent.  (Photo by Chip Somodevilla/Getty Images)WASHINGTON, DC - MAY 1: Federal Reserve Bank Chairman Jerome Powell announces that interest rates will remain unchanged during a press conference at the bank's William McChesney Martin Building on May 1, 2024 in Washington, DC.  After the regular two-day meeting of the Federal Open Markets Committee, Powell said the U.S. economy continues to show momentum and inflation has remained high in recent months.  This formed the basis for the Fed's decision to maintain the current interest rate of 5.33 percent.  (Photo by Chip Somodevilla/Getty Images)

Federal Reserve Bank Chairman Jerome Powell announces that interest rates will remain unchanged during a press conference at the bank’s William McChesney Martin Building on May 1, 2024 in Washington, DC (Chip Somodevilla/Getty Images) (Chip Somodevilla via Getty Images)

Elsewhere at his press conference, Powell outlined a variety of potential scenarios that could justify rate cuts, including inflation moving more convincingly toward the 2% target and an unexpected weakening in the labor market. Powell’s discussion of what could lead to a rate hike was less robust.

Pressed by Yahoo Finance’s Jennifer Schonberger on whether, for example, a rise in the unemployment rate above 4% would represent an unexpected softening, Powell said that a “few tenths [of a percentage point] in the unemployment rate, that probably wouldn’t happen.”

In March the unemployment rate was 3.8%. Economists expect the unemployment rate to remain unchanged in April.

Take this, then, as a signal that the bar is high for the Fed to reconsider its claim that interest rates have reached their peak for this economic cycle. A measure that is clearly much more stringent than a few months of inflation data that, in Powell’s words, has been “higher than expected” so far this year.

During Wednesday’s meeting, investors’ expectations for how often the Fed would cut rates in 2024 were steadily lowered.

As Yahoo Finance’s Josh Schafer noted on Wednesday, when the year started, nearly seven 0.25% rate cuts were priced in; as of Wednesday this had been reduced to just one.

As Neil Dutta of Renaissance Macro wrote, “Powell believes the policy is restrictive. If the policy is restrictive, they are more concerned about downside growth risks than upside inflation risks.”

Higher interest rates create challenges for borrowers and, like inflation, weigh more heavily on households with less financial resources. But for investors it is no longer about the level of interest rates, but about the direction of future changes.

Rates are high today. But confidence that interest rates will be lower in the future underpins much of the optimism, for example, that Big Tech’s AI spending will boost their future bottom line.

Powell’s prepared remarks on Wednesday no longer included language suggesting it would be appropriate to cut rates “at some point” this year. A notable one in the close-reading world of Fedspeak.

And Powell and the Fed’s inclination to cut rates remains clear.

As Wells Fargo economist Jay Bryson wrote on Wednesday, “Recent data appears to have pushed the FOMC away from the brink of rate cuts, but remains very comfortable with a wait-and-see approach.”

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