US dollar falls as Powell hints rates are at their peak, cuts coming

Key points

• Powell says inflation is still too high to begin cutting: (1:14)
• Current target rate is sufficiently restrictive, over time: (2:15)
• When will the first rate cut arrive?: (3:26)
• Employment now the Fed's focus as inflation gets closer to target: (5:02)
• US dollar sinks against major currencies: (6:55)

Powell says inflation is still too high to begin cutting

Jerome Powell, highlighting the recent core PCE inflation rate at 2.8% for March, emphasized that inflation remains too high for the Federal Reserve to consider rate cuts right now. Despite acknowledging the progress against inflation so far, Powell stressed the importance of reaching the 2% target—asserting that a figure of 2.8% significantly differs from the Fed's goal. Consequently, the Fed maintains its stance on holding off on rate adjustments, signaling that the data from Q1 2024 indicates it is premature for initiating cuts, despite a readiness to act once inflation aligns more closely with their objectives.

Current target rate is sufficiently restrictive, over time

While taking questions, Jerome Powell was prompted by a reporter to acknowledge that the Federal Reserve's target interest rate range of 5.25% to 5.5% is restrictive enough to meet the central bank's inflation and employment objectives over time. Although Powell did not specify a timeline, he expressed confidence in the policy's effectiveness, citing the beginning signs of its impact on the labor market, as evidenced by softer-than-expected job openings. This data, according to Powell, indicates a slowing demand within the employment sector. With inflation already retreating to below 3% from its peak, he hinted at the cessation of rate hikes, leaving the timing of the eventual rate cuts as the main question.

When will the first rate cut arrive?

Predictions around when the Fed will begin cutting rates continue to fluctuate with Powell's commentary pushing back the target date. Earlier in the week, September looked to be the likely date of a 25 bps cut, with CME futures markets pricing in a greater than 50% likelihood of a cut. Now, those probabilities have lowered below 50%, making the November meeting the most likely date of a potential cut.

Employment now the Fed's focus as inflation gets closer to target

As inflation rates begin to approach the target, descending below 3% over a 12-month perspective, the Federal Reserve's attention shifts towards their other mandate—employment. This pivot reflects a balanced approach to not only tempering inflation but also ensuring a robust labor market. Attention now turns to the Nonfarm Payrolls report at the end of the week, with mixed preliminary jobs data Tuesday and Wednesday already stirring markets.

US dollar sinks against major currencies

In the forex market, the US dollar weakened in response, evidenced by significant upticks in the EUR/USD and GBP/USD pairs, reaching 1.0700 and 1.2500 respectively. This movement reflects the global forex community's reaction to the Federal Reserve's latest policy stance and economic outlook as traders anticipate the coming rate cuts.

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