Investors anticipating market-juicing interest rate cuts from the Federal Reserve have started off 2024 with one piece of bad news after another. Three hot inflation reports, escalating conflict in the Middle East, rising oil prices, robust retail sales numbers—the list of evidence that the U.S. economy is running hot, and inflation will continue to be an issue, has grown long and varied. On Tuesday, Fed Chair Jerome Powell only reinforced that point when he confirmed what many forecasters have been expecting: interest rate cuts aren’t coming anytime soon.
“Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work,” Powell said at a policy forum on Canada-U.S. economic relations in Washington, D.C., adding that if inflation does persist the Fed will “maintain the current level of [interest rates] for as long as needed.”
The comments come after the latest consumer price index report showed year-over-year inflation rose for the third consecutive month in March, to 3.5%. That’s well below its June 2022 9.1% peak, but still off the most recent June 2023 low of just 3%, and far from the Fed’s 2% target.
Powell noted that recent data has shown a clear “lack of progress” in taming inflation, which means it will take longer than expected for Fed officials to be confident they can cut interest rates without reheating the economy. Quincy Krosby, chief global strategist for LPL Financial, told Fortune via email that Powell’s comments “underscored that the downward trajectory of inflation has essentially stalled.”
“Moreover, he made it clear—rather than his more ambiguous stance regarding a rate easing timetable—that the ‘higher for longer’ narrative remains intact,” she said. “This was unfriendly for equity markets, but markets got the message.”
Still, Powell’s new tone wasn’t exactly surprising, given the messaging from his fellow Fed officials in recent weeks following multiple hot inflation reports to start the year. After projecting three interest rate cuts just last month, Fed officials seem to be suddenly turning hawkish.
In late March, Atlanta Fed President Raphael Bostic, a voting member of the Federal Open Market Committee (FOMC) that sets interest rates, said he had “recalibrated” his interest rate outlook due to data that showed economic strength and stubborn inflation. Bostic now expects just one interest rate cut in 2024, and not until the end of the year. And just this week, Federal Reserve Vice Chair Philip Jefferson argued that interest rates will have to remain higher “for longer” than previously anticipated because the work to sustainably return inflation to 2% “is not yet done.”
The hawkish telegraphing from prominent Fed officials in recent weeks has led many Wall Street economists to argue that the most likely outcome for the U.S. economy is now a “no landing” scenario—where inflation remains an issue, but economic growth is strong.
As Ed Yardeni, the veteran market watcher and founder of Yardeni Research, explained in a Tuesday note, consumers keep spending because disposable incomes are rising; immigration is driving even more spending; and rising oil prices are convincing investors that inflation may be difficult to tame.
“That’s neither a hard nor a soft landing,” he argued. “The U.S. economy refuses to land…consumers didn’t get the recession memo.”
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