Powell admits cuts will take longer

Jerome Powell conceded on 16 April that persistent inflation will delay interest rate cuts, something the bond market had been pricing for weeks. Speaking in Washington after three straight months of hotter-than-expected inflation figures, the Fed chair said it would take 'longer than expected' to gain the confidence needed to ease policy.

No summer cut

The remarks buried the easing story that began at the Fed's December meeting. Powell said the central bank is prepared to hold its benchmark rate at 5.25–5.50 per cent for as long as necessary, which brings official guidance into line with what traders already believed. Hopes of a painless cut in the summer have been shelved.

It is worth recalling how confident the story looked four months ago. In December the Fed's own projections pencilled in three quarter-point cuts for this year, and Powell made little effort to talk markets down when futures priced twice that many. The March projections kept the median at three cuts. What changed was the data rather than the committee's instincts, and the chair has now acknowledged as much in public.

Three prints that changed the tone

January's consumer price figures were dismissed at first as a seasonal quirk, since firms tend to reset prices at the start of the year. February's reading was harder to wave away, and March removed the excuse entirely. Core prices rose 0.4 per cent on the month for a third time, and headline inflation climbed to 3.5 per cent from a year earlier, up from 3.1 per cent in January. A labour market that keeps adding jobs at a healthy clip has given the Fed no reason to hurry.

The composition is what worries officials. Goods prices, which drove the disinflation of 2023 as supply chains healed, have stopped falling fast enough to offset services. Shelter costs are still rising briskly, and motor insurance and medical care have added pressure of their own. Services inflation tends to track wages, and wages move slowly, so a stall here is less likely to reverse on its own within a quarter or two.

Who pays for the delay

The mechanism is simple enough. The fed funds rate sets the cost of overnight money for banks, and that feeds through to the prime rate, to adjustable-rate loans and to the interest charged on credit cards, where average rates already sit above 20 per cent. Longer-term borrowing costs move with Treasury yields, which rise whenever the market pushes the first cut further out. Thirty-year mortgage rates have climbed back towards 7 per cent on the back of that repricing, and the spring buying season is the worst possible moment for it.

Housing takes the first hit. Many American homeowners locked in fixed rates far below current levels in 2020 and 2021, so few want to sell and swap a cheap loan for an expensive one. That keeps the supply of existing homes thin, holds prices up and shuts first-time buyers out. Corporate borrowers face a similar squeeze on a longer fuse, as debt issued cheaply during the pandemic falls due and must be refinanced at today's rates. Commercial property owners and the regional banks that lend to them have the least room to absorb it.

Savers, by contrast, are doing well. Money market funds and bank deposits still pay more than inflation, and the longer the Fed holds, the longer that windfall runs. Retirees who hold cash and Treasury bills are earning a return above inflation, something that was rare in the decade after the 2008 crisis. The dollar also benefits, since other central banks look closer to easing, which makes imports cheaper for Americans and harder to pay for everywhere else.

Burns and the premature pivot

The ghost in the room is Arthur Burns. The Fed under his leadership in the 1970s eased policy as soon as inflation showed signs of retreat, only to see prices take off again, eventually requiring the far harsher tightening that Paul Volcker imposed. No sitting Fed chair wants to repeat that sequence, and Powell has referred more than once to the lessons of that decade. Holding rates for a few extra months is a cheap insurance premium against being remembered for a second wave of inflation.

The international picture reinforces the point. The European Central Bank has signalled that it could begin cutting in June, and several other central banks are edging the same way because their inflation problems are easing faster. If the Fed stays put while others move, the rate gap widens and the dollar firms. That tightens financial conditions in emerging markets that borrow in dollars, which is one channel through which a patient Fed exports its policy abroad.

The case for patience running too long

The strongest counterargument is that policy is already tight and working with a lag. Real interest rates, measured against falling inflation, rose through 2023 without the Fed lifting a finger. Market rents on new leases have slowed markedly, and that should feed into official shelter figures with a delay of many months. The Fed's preferred measure, the personal consumption expenditures index, also runs below the consumer price index, largely because it gives housing a smaller weight. Seen that way, three hot months could look like a pause on the road down rather than a turn.

That argument may well prove right by the autumn. It does not help borrowers now, because the Fed has decided to wait for the evidence rather than trust the models, and it has said so. The costs of holding a little too long look manageable to officials while unemployment stays low. The costs of cutting too early, and having to reverse, look far worse.

What would shift the calendar

The next checkpoints are close. The committee meets at the start of May, and the April consumer price report arrives in the middle of that month. A monthly core reading of 0.2 per cent or below would revive talk of a cut in the second half; another 0.4 per cent would push the debate into next year and could even bring rate increases back into discussion. Payroll growth, wage settlements and the quarterly employment cost index will matter almost as much, because they show whether services inflation has a source that will persist.

The Fed has given ground to the data, and borrowers will pay for it. Mortgage, corporate and consumer rates are likely to stay close to current levels for months yet, and for longer still if inflation refuses to cool. The practical judgement is that no cut arrives before September at the earliest, and homebuyers and refinancing companies should expect to carry today's rates through the summer.