Despite the Fed’s Jay Powell’s pushback, traders are upping the ante on US rate cuts

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Jay Powell tried to play down speculation that the Federal Reserve had won its fight against inflation, even as traders bet the US central bank could start cutting interest rates as early as next March.

In a speech on Friday, the central bank chief indicated it was too early to rule out further rate hikes or discuss cuts.

“It’s about making decisions with confidence that we’ve reached a sufficiently restrictive stance or speculating when policy will be eased,” he said, shortly before the start of a quiet period ahead of the year-end monetary policy meeting.

The yield on the policy-sensitive two-year Treasury note fell 0.14 percentage points to a five-month low of 4.56 percent after Powell’s comments, suggesting investors were largely brushing off his warnings. Traders in the federal funds futures markets now see a two-thirds chance of the Fed cutting rates in March 2024, up from 20 percent a week ago.

Stocks also rallied, with the S&P 500 ending the day up 0.6 percent at 4,594.63, its highest finish since March 2022.

“A few weeks ago, Powell said policy was tight, but (on Friday he added) he believes policy is ‘within tight territory.’ I think it’s reasonable for markets to tune in to that nuance,” said Jeffrey Roche, chief economist at LPL Financial.

Gold hit an all-time high, rising 1.9 percent to $2,075.09 a troy ounce, surpassing the previous intraday peak set in August 2020.

The metal gains when the dollar weakens as the currency does in anticipation of the next move lower in US rates.

In about two weeks, the Federal Open Market Committee is poised to hold its key policy rate again at a 22-year high of 5.25 to 5.5 percent, which it has held since July. The central bank began a historic push to raise interest rates in March 2022 in an effort to stem rising inflation.

But concerns about easing conditions in financial markets and heightened uncertainty about the U.S. inflation outlook kept officials cautious as the central bank paused its rate hike campaign. They refrained from signaling more definitively that it had reached a peak in interest rates and from discussing criteria for lowering borrowing costs.

To consider cuts, the central bank will need to look at several inflation reports that confirm this trend.

Powell confirmed the news on Friday, warning at an event at Spelman College in Georgia that the U.S. Federal Reserve “stands ready to tighten policy further if it is appropriate to do so,” adding that policy is “well contained.” territory” and the full effects of the central bank’s past actions are yet to materialize.

In a discussion at the event, he stressed that the central bank will closely monitor economic data. “Let information reveal the right path,” he said.

“While the lower inflation readings in the last few months are welcome, that improvement must continue if we are to achieve our 2 percent target,” he said.

On Friday, Austin Goolsbee, president of the Chicago Fed and a voting member of this year’s FOMC, said there was “no evidence” that inflation was going to stand at 3 percent, instead predicting it would fall. Return to the central bank’s long-term target of 2 percent.

As of October, the core personal consumption expenditure price index — the central bank’s preferred measure of inflation — was at an annual pace of 3.5 percent.

Additional reporting by Kate Dukitt in New York

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