Central banks worldwide reconsider rate cuts amid persistent inflation and resilient economic growth. Fed Chair Jerome Powell and others now signal a cautious approach to monetary easing.
Bollywood Fever: Six months ago, major central banks were poised to lower interest rates, a move that promised cheaper borrowing for consumers and businesses. However, this anticipated shift has largely stalled as inflation proves more persistent and economic growth remains resilient.
Federal Reserve Chair Jerome Powell had indicated in a December press conference that rate cuts were under discussion, raising investor optimism. However, concerns from organizations like the International Monetary Fund that such cuts could prematurely undermine inflation control were unfounded.
The expected joint easing of monetary policy has not materialized as planned. While the European Central Bank and Bank of Canada made modest rate cuts recently, this was mainly to honor prior commitments when inflation seemed to be declining. The general stance among central banks has shifted to a more cautious “hold your horses” approach.
After rapid interest rate hikes in 2022 and 2023 to combat inflation, Powell emphasized the need for careful timing of policy loosening. He highlighted the significance of the initial rate cut, now projected to be a single quarter-percentage-point by year’s end, down from the three cuts projected in December and March. “When we do start to loosen policy, that will show up in significant loosening and financial market conditions,” Powell stated. “You want to get it right.”
Most economists surveyed now expect one or two Fed rate cuts this year, a reduction from the four anticipated last December. Market expectations have also adjusted, with economists consistently predicting the Bank of England will wait until the third quarter for rate cuts, aligning with current expectations for an August move.
Headline inflation has fallen closer to the BoE’s 2% target, but higher-than-expected inflation in the services sector and strong wage growth complicate the situation. As a result, the BoE is expected to maintain rates at its last policy meeting before the UK’s general election, leaving the move towards lower borrowing costs to the next government.
Similarly, economists’ predictions for the ECB‘s first cut have been accurate, forecasting a June move. However, market pricing has dramatically shifted from anticipating substantial cuts to now barely expecting one more rate cut this year. ECB policymakers have long warned of potential “bumps in the road” in their inflation control efforts, signaling markets to temper their expectations.
Additional challenges include market reactions to political developments, such as French President Emmanuel Macron’s decision to call a snap parliamentary election. Despite this, ECB President Christine Lagarde remains confident in reaching the 2% inflation target by the end of 2025. ECB policymaker Mario Centeno emphasized the careful balance between controlling inflation and supporting economic growth.
Managing expectations has been crucial. In December, Powell’s remarks suggested progress on inflation, solidifying views that rate cuts were imminent. However, the current strict language about cuts aims to manage expectations, possibly keeping rates stable longer than anticipated.
Recent data indicates weakening price pressures, and despite Powell’s cautious stance, investors still expect rate cuts to begin in September. The prolonged period of restrictive monetary policy raises concerns about potential economic strain. Nick Bunker, economic research director for North America at the Indeed Hiring Lab, warned that continued restrictive policy might push labor demand down and increase unemployment beyond the projected 4%.
As central banks navigate these complexities, the global economic landscape remains in a delicate balance between controlling inflation and fostering growth.
Also Read, SEC Pursues $102.6 Million Penalty from Ripple, Rejecting $10 Million Proposal
India’s Enforcement Directorate Uncovers Cryptocurrency Ponzi Scheme, Seizes Assets