Why an Interest Rate Cut is Unlikely in 2023: Experts Share Insights

•  Shai.Gal

•  Feb 21 2023
 

Jerome Powell emphasized, as many believed, the factors that will require great vigilance and patience on the part of the Fed, in the continuation of its fight against inflation, its containment and the conviction that it is indeed falling consistently towards the target level, and this before the interest rate even signals signs of a decrease, not all Because you will actually go down.

The very strong employment report made the experts understand, ahead of time, that this was the message that Powell would send in his words, which resulted in the maturity yields on the government bonds rising, indeed, but to a moderate extent and with an emphasis on the longer maturity periods - Because the consequences are that interest rates will remain higher for a longer period.

His statement regarding the possibility that the interest rate will rise more than what the market realized until recently did not surprise either, since it is a time when the market embodies a lack of pricing for further interest rate increases and the employment report only reinforced this. However, from this point on, the monetary tightening policy and the data-dependent policy will be more intertwined than before, since the sensitivity to the next employment reports and consumer price indices will increase greatly - both in terms of the market and its reactions and in terms of the consequences these reports will have on the continuation of interest rate increases - here and there. This ensures, by the way, continued strong fluctuations of the market leading up to and following these events and they will even get stronger with the end of the report season and the rise of the macro data to the top of the agenda.

It is important to note that Powell chose to give as an example cases where the employment report will be stronger, rather than weaker, which would require an interest rate increase, which may show that for him the balance of risks to inflation is still leaning upwards. All in all, all along the way, the Fed has stuck to its position that it still has a lot of work to do in the way of declaring victory over inflation and that an economic, consumer and employment slowdown will, in fact, be a tool to ensure that this happens; His words yesterday were a direct continuation of this approach verbally and in action.

For now, there are no signs that the US economy won't finally register a soft landing, which bodes well for the economy, but complicates and prolongs the Fed's job. This is why the yield curve to maturity became a little steeper as a result.

The stock market went down, at first, but then went back up, in my estimation because Powell's words were priced in earlier and the sense of relief was that even more hawkish things were not said.

The importance of Powell's words is that the road to the 2 percent inflation target is still long, which shows that the Fed is not "taking advantage" of the calls to raise the inflation target in order to adopt a less restrictive policy. Another importance is his statement that the segmentation of inflation points to the service sector which still shows no signs of stopping and calming down. At the end of the day, this is the sector that monetary policy is trying to curb. This is her mandate.

Conclusion

Bottom line, Powell admitted as a matter of course that there is no denying that inflation has started to decline. Its decline began, in fact, already 6 months ago. But its level was very high at the beginning of the process and so was the inflation excluding food and energy, which the Fed targets. Therefore, we have not yet reached a situation where all options are on the table - lowering interest rates will not be on the agenda this year. Powell did not renew, yesterday, but made order and sketched the situation picture for the rest of the year.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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