US Federal Reserve Chairman Jerome Powell affirmed last week that the central bank had met its inflation target. The news comes as the Fed faced its highest interest rates in over two decades, between 5.25% and 5.5%. Powell announced that the Fed had likely reached its peak in rate hikes and would now turn its focus towards potential rate cuts in the future.
The Fed’s preferred measure of inflation, the core Personal Consumption Expenditures (core PCE) index, stood at 2.9% year-over-year in December, which was better than expectations. This marked the first time the inflation gauge had fallen below 3% since March 2021, well before the central bank initiated its aggressive rate hike campaign. Even more encouraging was the core PCE inflation rate falling to 1.5% on a three-month annualized basis, its lowest level since late 2020.
The question now is whether the data justifies a rate cut as expected by investors, with some predicting the first cut to come as early as March. Fed officials predicted three cuts this year, without specifying exactly when they might occur. However, traders are now estimating a 46% chance that the U.S. central bank will cut rates at its March meeting – a decrease from previous estimates.
The strong economic growth, with a preliminary estimate of US gross domestic product (GDP) for the fourth quarter of 2023 exceeding analysts’ forecasts, could support the case for postponing any rate cuts beyond March. If economic growth continues to surprise to the upside and inflation rises again, the Fed could be forced to keep rates at current levels for longer.
Fed Chair Jay Powell mentioned that the central bank would want to be “easing restrictions on the economy” long before inflation hits 2%. With expectations of possible rate cuts in the near future and uncertainty about the impact of inflation, all eyes will be on the Federal Reserve in the coming months.