Despite slowing economic growth, rising inflation, and contradictory data, the Federal Reserve is likely to maintain its go-slow approach and keep interest rates unchanged for the coming months, with expectations of no cuts this week and possibly beyond the summer. Inflation has climbed by 2.7% over the past 12 months, the highest annual increase in four months, leading to discussions among Fed policymakers on the need to reassess the economic situation.
(Bloomberg) -- Jerome Powells remarks in the coming week will be closely parsed by investors for any clues on just how long the Federal Reserve is willing to wait before cutting interest rates. Most Read from Bloomberg Apple Intensifies Talks With OpenAI for iPhone Generative AI Features Plunging Home Prices, Fleeing Companies: Austins Glow Is Fading Wall Street Humbled as Fast-Reversing Markets Confound the Pros The Long, Slow Death of Urban Nightlife BHPs $39 Billion Copper Play Was Years in the Making The last time the US central bank chair spoke, he signaled that policymakers were likely to keep borrowing costs high for longer than previously anticipated, pointing to the lack of further progress on bringing inflation down, and to enduring strength in the labor market. The latest price data, which showed stubborn underlying inflation, in tandem with expectations for a robust employment report on Friday, arent likely to lead the Fed chief to change his tune. Powell will address reporters after the Feds rate decision on Wednesday, when the central bank is widely expected to hold borrowing costs at a more than two decade high. Expectations for rate reductions have been pushed further into 2024, and investors are now betting on two cuts at most by year-end.
By Howard Schneider WASHINGTON (Reuters) - Inflation showing no recent sign of slowing or narrowing in scope leaves U.S. Federal Reserve policymakers challenged this week over how to characterize their next steps even as the countdown to a contentious U.S. presidential election continues.
The core personal consumption expenditures price index in the US, excluding food and energy components, rose 0.3% from the prior month and 2.8% from a year ago, leading to concerns about persistent price pressures and likely delaying any interest-rate cuts. Federal Reserve policymakers are expected to hold borrowing costs at a two-decade high as faster inflation and steady household spending suggest refraining from lowering interest rates until later this year.
Inflation data has led to speculation that the Federal Reserve may not cut rates this year, keeping mortgage rates high. The latest PCE price index showed prices rising faster than expected, causing 30-year mortgage rates to increase above 7%. Forecasts suggest rates could trend down later in the year, with Fannie Mae predicting a rate of 6.4% by the end of 2024. Home prices are still high but showing signs of cooling, with home sales expected to dip due to rising interest rates.
Rate cuts by the Federal Reserve may not be the boon investors are hoping for. That's because the Fed is only likely to ease monetary policy when the economy is slammed with a recession and the market is flailing, according to famous " Black Swan" investor Mark Spitznagel . In a recent interview with Reuters , the Universa Investments CIO cast a stark warning about stocks and the economy. According to the CME FedWatch tool, investors are expecting one to two cuts to come in 2024, which are expected to be bullish for stocks. But the only way the Fed will cut rates is if central bankers see a significant weakening in the economy meaning the US could see a downturn and a market plunge before interest rates come down, Spitznagel warned.
The U.S. consumer confidence index for April is estimated to be 104.0, showing a slight decline from the previous month, indicating steady consumer confidence amid concerns about higher prices. The Federal Reserve is expected to provide an interest rate policy update following a two-day meeting, with recent statements suggesting a delay in rate cuts due to persistent inflation. Economists predict that nonfarm U.S. employers added 205,000 jobs in April, a decline from March's 303,000 jobs added.
The Personal Consumption Expenditures price index rose to 2.7% for the year ending in March, exceeding economists' expectations of a 2.6% increase. Despite a slight slowdown from previous highs, inflation remains above the Federal Reserve's 2% target. Rising gas prices and persistent increases in shelter costs and overall services contribute to the prolonged high inflation levels, posing challenges for economists and the Fed. The core PCE index, excluding volatile food and energy prices, remained steady at 2.8% annually in March, highlighting the ongoing inflationary pressures.
The S&P 500, Dow Jones Industrial Average, and Nasdaq composite all rose on Monday, with Amazon and Apple set to report earnings. The Federal Reserve is expected to maintain interest rates, and the US jobs report is due on Friday. The 10-year Treasury note yield fell to 4.61%. Year-to-date, S&P 500 is up 7.3%, Dow is up 1.8%, Nasdaq is up 6.5%, and Russell 2000 is down 0.5%.
The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a series of financial panics (particularly the panic of 1907) led to the desire for central control of the monetary system in order to alleviate financial crises. Over the years, events such as the Great Depression in the 1930s and the Great Recession during the 2000s have led to the expansion of the roles and responsibilities of the Federal Reserve System.Congress established three key objectives for monetary policy in the Federal Reserve Act: maximizing employment, stabilizing prices, and moderating long-term interest rates. The first two objectives are sometimes referred to as the Federal Reserve's dual mandate. Its duties have expanded over the years, and currently also include supervising and regulating banks, maintaining the stability of the financial system, and providing financial services to depository institutions, the U.S. government, and foreign official institutions. The Fed also conducts research into the economy and provides numerous publications, such as the Beige Book and the FRED database.The Federal Reserve System is composed of several layers. It is governed by the presidentially-appointed board of governors or Federal Reserve Board (FRB). Twelve regional Federal Reserve Banks, located in cities throughout the nation, regulate and oversee privately-owned commercial banks. Nationally chartered commercial banks are required to hold stock in, and can elect some board members of, the Federal Reserve Bank of their region.The Federal Open Market Committee (FOMC) sets monetary policy by adjusting the target for the federal funds rate, which influences market interest rates generally and via the monetary transmission mechanism in turn US economic activity. The FOMC consists of all seven members of the board of governors and the twelve regional Federal Reserve Bank presidents, though only five bank presidents vote at a time—the president of the New York Fed and four others who rotate through one-year voting terms. There are also various advisory councils. It has a structure unique among central banks, and is also unusual in that the United States Department of the Treasury, an entity outside of the central bank, prints the currency used.The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury, and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion. Although an instrument of the U.S. government, the Federal Reserve System considers itself "an independent central bank because its monetary policy decisions do not have to be approved by the president or by anyone else in the executive or legislative branches of government, it does not receive funding appropriated by Congress, and the terms of the members of the board of governors span multiple presidential and congressional terms."
The nation's central bank might look quite different if former President Donald Trump wins the upcoming election. The Wall Street Journal reported on Thursday night that members of Trump's team are creating plans that would restructure the Federal Reserve and allow Trump to influence the Fed's actions, according to people familiar a move that would erode the Fed's independence from political entities. According to the Journal, the proposals would give Trump a say on interest-rate decisions , along with giving him the authority to oust Fed Chair Jerome Powell from his position before his term is up in 2026. Trump's advisors cautioned that the campaign has not confirmed these plans: "Let us be very specific here: unless a message is coming directly from President Trump or an authorized member of his campaign team, no aspect of future presidential staffing or policy announcements should be deemed official," Trump senior advisors Susie Wiles and Chris LaCivita told the Journal. The Journal also reported that the proposal would require the Fed to be subject to review by the Office of Management and Budget when issuing new rules a process that other federal agencies have to undergo and would be another effort to diminish the central bank's independence on matters of banking regulation.
The chairman of the Board of Governors of the Federal Reserve System is the head of the Federal Reserve, and is the active executive officer of the Board of Governors of the Federal Reserve System. The chairman presides at meetings of the Board.The chairman serves a four-year term after being nominated by the president of the United States and confirmed by the United States Senate; the officeholder serves concurrently as member of the Board of Governors. The chairman may serve multiple terms, pending a new nomination and confirmation at the end of each term, with William McChesney Martin as the longest serving chair from 1951 to 1970 and Alan Greenspan as a close second. The president may not have the legal authority to dismiss a chairman before the end of a term, although this assumption has never been tested in court.The current chairman is Jerome Powell, who was sworn in on February 5, 2018. He was nominated to the position by President Donald Trump on November 2, 2017, and later confirmed by the Senate. He was subsequently nominated to a second term by President Joe Biden, later confirmed by the Senate and sworn in on May 23, 2022.
The Federal Reserve System, commonly known as "the Fed," has faced various criticisms since its establishment in 1913. Critics have questioned its effectiveness in managing inflation, regulating the banking system, and stabilizing the economy. Notable critics include Nobel laureate economist Milton Friedman and his fellow monetarist Anna Schwartz, who argued that the Fed's policies exacerbated the Great Depression. More recently, former Congressman Ron Paul has advocated for the abolition of the Fed and a return to a gold standard.Critics have also raised concerns about the Fed's role in fractional reserve banking, its contribution to economic cycles, and its transparency. The Fed has been accused of causing economic downturns, including the 2007-2008 financial crisis, and of being influenced by private interests. Despite these criticisms, the Federal Reserve remains a central institution in the United States' financial system, with ongoing debates about its role, policies, and the need for reform.
Supported by coordinated macroeconomic policies, China's economy achieved a strong start in the first quarter of 2024, demonstrating a stable and positive trajectory. As the second quarter unfolds, the international economic environment continues to be marked by complexity and uncertainty. The possibility of a postponement in interest rate cuts by the US Federal Reserve looms. Factors such as stronger-than-expected economic growth in the United States and a slowdown in the pace of inflation might lead the Fed to defer the anticipated rate cuts at the end of the second quarter, potentially reducing the magnitude of the cuts as well. Increased volatility is expected in international financial markets.
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