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US Fed moving closer to interest rate cut

Comments by Fed chair Jay Powell come a day after ECB signalled possible movement in June

Federal Reserve chairman Jay Powell.

Fri Mar 8 2024 - 12:50

The US Federal Reserve is “not far” from having the confidence to start cutting interest rates, its chair Jay Powell has said, bolstering hopes that the central bank will lower borrowing costs in the coming months.

Mr Powell told US senators on Thursday that the Federal Open Market Committee was “in the right place” on monetary policy while it waited for proof that almost two years of higher rates had tamed inflation.

“We’re waiting to become more confident that inflation is moving sustainably to 2 per cent,” the Fed chair said, referring to the central bank’s official inflation target.

“And when we do get that confidence, and we’re not far from it, it will be appropriate to dial back the level of restriction so that we don’t drive the economy into recession.”

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Powell’s comments will add to hopes the Fed is at last preparing to ease monetary policy after months of holding rates at a 23-year high of between 5.25 per cent and 5.50 per cent – part of its quest to quell price pressures that surged as the US economy emerged from the pandemic.

Futures prices imply investors have priced in a quarter-point cut by July, with many betting the move will actually come in June.

The personal consumption expenditures prices index, the headline inflation gauge used by the Fed to measure progress against its 2 per cent target, is now at just 2.4 per cent, having hit a high of 7 per cent in 2022.

Powell was speaking in Washington just hours after European Central Bank president Christine Lagarde signalled the central bank could begin lowering interest rates in June.

Stocks and bonds were both higher on Thursday, with the S&P 500 up 1.2 per cent while yields on rate-sensitive two-year treasuries hovered around three-week lows at 4.52 per cent.

The Fed’s rate-setters next meet on March 20th, when the FOMC is widely expected to keep interest rates on hold. The Fed will also unveil a new so-called “dot plot”, detailing how many times officials think the central bank will cut rates in 2024.

The ECB on Thursday also downgraded its growth forecasts for the fourth time in a row, saying it expected the euro zone economy to expand 0.6 per cent this year, compared with the previous estimate of 0.8 per cent. Many economists expect the to Fed upgrade its US GDP projections at the March vote. – Copyright The Financial Times

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