DWS: Fed pushes back on imminent rate cuts and moves to a neutral position

DWS: Fed pushes back on imminent rate cuts and moves to a neutral position

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As widely expected, central bankers left interest rates unchanged at their first meeting of the year. The real news, however, was a clear message in their press statement: they do not intend to cut rates until they gain greater confidence that inflation is indeed cooling.

This hint that rate cuts are not imminent comes along with their new assessment of more balanced risks and the removal of a tightening bias for possible rate adjustments in the future. Fed Chair Powell acknowledged progress on inflation in the press conference, but also stated that it is still too high and further progress is not assured.

Labor markets remain tight, and to avoid the mistake of allowing inflation to stabilize above their target, they are willing to keep rates in restrictive territory for longer if incoming data warrant it. At the same time, they believe it will probably be appropriate to lower rates at some point this year - but the timing will depend on their confidence that inflation is indeed cooling further. Still, they are not in a position to make any plans for rate cuts, he added.

Overall, Fed Chairman Jerome Powell walked a fine line between being hawkish on inflation and sending dovish signals on their future expectations - something that went a bit in the wrong direction at the last meeting. Looking ahead, we feel confirmed that March is too early for the Fed to declare victory. However, we believe that the next meeting could telegraph the conditions for a rate cut, while we continue to expect a first rate cut in Q2.