Federal Reserve Bank Chairman Jerome Powell and other bankers’ message is coming across loud and clear—the central bank is tapping the brakes on the prospect of March interest rate cuts.
That delay in expected rate cuts has veteran analysts like Goldman Sachs Chief Economist Jan Hatzius stepping back on their predictions of a March cut.
The investment bank now expects four reductions this year, versus five previously, with the reductions taking place in June, July, September and December, Hatzius and other Goldman Sachs economists said in a note yesterday.
The revised rate cut prediction is based on the message telegraphed by three Federal Reserve officials yesterday, who signaled that the central bank is postponing reductions until it collects more inflation and economic data. The central bank still expects to cut rates sometime this year, but not at its March meeting, as many economists and stock market pundits have been predicting.
Hatzius said the U.S.’s strong economic data has signaled to central bankers that “cuts are not urgently needed.”
There is still a risk that the Fed won’t begin cutting in June, Goldman said. "We see a 25% risk that the [the central bank] ends up waiting longer before starting to cut rates and then proceeding more gradually, given the possibility of continued stickiness in wage growth and underlying services inflation," the brokerage warned.
Fed officials said they want to see inflation fall to its 2% target in the second quarter of this year from 4% last month, though they expect a bump toward the end of the year based on energy price increases.
On the other side of the rate equation, Moodys Analytics Chief Economist Mark Zandi is concerned that the Fed’s pause in cuts may trigger more problems than a modest cut would trigger.
“The Fed would prefer to risk waiting too long to lower rates—significantly weakening the economy or even precipitating a recession—than risk cutting rates too soon and allowing the economy and inflation to rev back up,” Zandi said on X.
“This is a difficult policy needle to threat and the risk that the Fed won’t be able to manage it is the most serious threat to the good economy,” he continued.
Earlier in the week, Zandi told CNBC that the Fed is “within spitting distance” of achieving its two main duties, creating full employment at 3.5% to 4% and anchoring inflation expectations.
“Growth feels like it’s slowing, particularly in the labor market ... and we are also starting to see signs of slowing in overall economic growth. Financial markets are under and lot of pressure when rates are this high and the yield curve is inverted. Why take the risk [of keeping rates high]? Just declare victory, we’re there,” Zandi said.