It’s been two years since the Federal Reserve first raised interest rates in the wake of the Covid-19 pandemic.
While the hot topic of interest rate cuts hinted at in Powell’s speech has fueled optimism since last year, a growing number of economists and investors believe the hawkish stance is likely to persist in the second half of this year.
Conceptually, when inflation loses its grip on buoyant economic growth, hawkish policies are implemented by raising interest rates to slow consumer purchasing power. If the economy grows slower than expected, policymakers will become dovish by lowering interest rates and printing money (or, better known as quantitative easing).
Some remain confident that the Fed will stick to its pledge to turn dovish, with inflation potentially falling to its 2% target this year from about 3% currently.
However, rising gold prices and the geopolitical crisis in the Middle East may cast a veil on stabilizing inflation, prompting consumers to worry that commodity prices may even rebound to 2022 levels. Figure 1 shows that the latest release of inflation appears to have rebounded from 3.1% in January to 3.5% in March 2024.
Not to say, if Trump takes office as U.S. president at the end of the year, possible higher tariffs and an intensifying trade war could push prices out of control again. The pledge to keep inflation at 2% will force the Fed to at least keep interest rates on hold or even raise them.
This hints a rate cut may still be months away.
