By Nigel Green
If the Federal Reserve does cut interest rates later this year, it is likely to be followed by another pause, I’m warning investors.
The warning comes as the US central bank is “not far” from having the confidence to start cutting interest rates, its chair Jerome Powell has said, fuelling hopes it will be able to lower borrowing costs in the coming months.
“We’re waiting to become more confident that inflation is moving sustainably to 2%,” 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.”
These comments are boosting market sentiment and could lead to over-exuberance, froth and heat.
Indeed, stocks and bonds were both higher on Thursday, with the S&P 500 up 1.2% while yields on rate-sensitive two-year Treasuries hovered around three-week lows at 4.5%.
However, I would urge investors to avoid complacency.
We maintain that the Fed is likely to delay cutting interest rates until the latter part of the year – indeed, a March rate cut has all but been ruled out.
The language being used this week by Powell is still cautious, stressing “waiting” to become confident and “when we do” get confidence.
This is not a departure from what he has been saying for more than a year.
The warning also lies in the recent developments in the Federal Reserve’s preferred inflation gauge – the core personal consumption expenditures (PCE) price index.
Data from the PCE index reveals a notable increase in prices last month, signalling a shift from previous trends.
Specifically, the monthly change in the core PCE index, which excludes the volatile costs of food and energy, recorded a substantial uptick in January.
The acceleration in the core PCE index will, of course, raise concerns about the potential impact of inflationary pressures, and it suggests that the surge in prices may prompt the US central bank to reconsider the timing of interest rate cuts.
For me, markets are reading too much into these comments by Chair Powell – and investors are indulging in wishful thinking.
We expect the Fed will likely maintain its steady position on rates for a while longer, maybe with a rate cut coming in the third quarter of this year.
In addition, we believe that when there is a pivot and rates are cut, there will likely be a pause in the following meeting in order to analyze how the policy shift is affecting the world’s largest economy.
If officials see the cut leads to too much market fizz and demand, adding to price pressures. we could reasonably assume it would become an extended pause.
The situation is fluid and nuanced. Investors should remain vigilant and proactive and recognize the delicate balance the Fed is having to address.
(Author is deVere Group CEO and Founder)