Traders are boosting US interest rate cut bets despite opposition from Federal Reserve Chairman Jay Powell

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Jay Powell sought to push back on speculation that the Federal Reserve has won its battle against inflation, even as traders boosted their bets that the US central bank could start cutting interest rates as early as next March.

In a speech on Friday, the Fed chairman indicated that it was too early to rule out further rate hikes or start discussing cuts.

“It would be too early to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy will be eased,” he said, before beginning a quiet period leading up to the final monetary policy meeting of the year.

After Powell’s comments, yields on policy-sensitive two-year Treasuries reached a five-month low of 4.56 percent, suggesting investors had largely ignored his warnings. Traders in federal funds futures markets now see about a two-thirds chance the Fed will cut interest rates as early as March 2024, up from about 20 percent a week ago.

Stocks were also higher, with the S&P 500 up 0.4 percent by mid-afternoon at 4,588. It earlier reached 4,599.39, surpassing this year’s closing peak reached in July.

In about two weeks, the Federal Open Market Committee is preparing to hold its benchmark interest rate steady again at a 22-year high of 5.25 to 5.5 percent, a level it has held since July. The Federal Reserve began a historic campaign to raise interest rates in March 2022 in an attempt to stamp out rising inflation.

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But even as the Fed continues to pause its campaign to raise interest rates, the high degree of uncertainty about the US inflation outlook and concerns about easing conditions in financial markets has officials worried. They refrained from referring more specifically to the peak in interest rates and discussing benchmarks for lowering borrowing costs.

In order for cuts to be considered, the Fed needs to see several inflation reports that support this trend.

Powell on Friday reiterated that message, warning at an event at Spelman College in Georgia that the US central bank was “prepared to tighten policy further if it becomes appropriate to do so,” even as he made clear that policy was “moving toward tightening.” “The full effects of the Fed’s previous actions have not yet been realized.

In a discussion during the event, he stressed that the Fed will be monitoring economic data closely. “Let the data reveal the appropriate path,” he said.

“Although the lower inflation readings of the past few months are welcome, this progress must continue if we are to reach our 2 percent target,” he added.

Also on Friday, Austan Goolsbee, president of the Chicago Fed and a voting member of the Federal Open Market Committee this year, said so far there was “no evidence” that inflation would stop at 3 percent, predicting instead that it would decline. Back to the Fed’s long-term target of 2 percent.

As of October, the core personal consumption expenditures price index — the Fed’s preferred measure of inflation — was at an annual pace of 3.5 percent.

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Additional reporting by Kate Duguid and Jennifer Hughes in New York

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