Federal Reserve Chairman Jerome Powell said on Tuesday that inflation is beginning to drop, but he expects it to be a long process, and he warned that interest rates could climb more than markets predict if the economic data doesn’t cooperate.
At a recent event in Washington, D.C., the head of the central bank stated, “The disinflationary process, the process of getting inflation down, has begun and it has begun in the goods sector, which is about a quarter of our economy.” Still, there is a long way to go. The process is still in its early stage, he added.
His comments buoyed investors’ optimism for a more dovish monetary policy, which had dwindled following Friday’s positive U.S. jobs report. As for the January nonfarm payrolls report, Powell said, “We didn’t expect it to be this strong,” adding that the data “shows why we think this will be a process that takes quite a bit of time.”
According to Shawn Cruz, the head trading strategist at TD Ameritrade, “Powell expects they’re not going to be cutting rates anytime soon, but that there is a good path, that they’re accomplishing what they need to accomplish.”
The major Wall Street indices saw dramatic swings during and after Powell’s comments, and that volatility isn’t expected to abate anytime soon, according to market watchers.
It will be difficult to push the markets up decisively unless there is softness and inflation throughout the economy and the globe, according to Carol Schleif, chief investment officer at BMO Family Office.
After Powell’s comments, Morgan Stanley increased its projection for the May policy meeting by 25 basis points, but maintained its expectation for the first 25 basis point rate drop in December 2023.
