Powell says the Fed is in no hurry to cut rates during congressional testimony

Today the chairman Powell continued the narrative that he and other Federal Reserve officials have been reinforcing, that the Federal Reserve is “in no hurry to cut rates”. 

In his opening remarks before the House Financial Services Committee, he said that it “won’t be appropriate” to cut rates until central bankers have “greater confidence” that inflation is under sufficient control. He stressed the importance of correctly timing rate cuts saying that cutting rates “too soon or too much” would likely lead to even more rate hikes at a later date. 

He acknowledged that its benchmark Fed funds interest rate which are currently between 5 ¼% and 5 ½% is most likely at its peak, and that the Federal Reserve will cut rates at some point this year but failed to speculate on when the Fed will implement its first rate cut.

His testimony provided no new insight saying, “We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.” He added caution to a statement saying, “But the economic outlook is uncertain, and ongoing progress towards her 2% inflation objective is not assured.”

Within that framework he acknowledged where the economy is with, “strong job creation”, and that “inflation has come down”, but there is “farther to go before they can consider the idea of rate cuts”. He also added that “cutting interest rates too soon risks inflation getting out of control”.

During the Q and A portion of his testimony, he was asked if he could explain what evidence he is looking for before inflation returned to 2% and interest rates can be cut? He responded by saying, “So we're not looking for inflation to go all the way down to 2%, that’s not what we’re looking for. What we want is just more evidence that will give us more confidence that inflation is on a path down to 2%, sustainably. So that will come in the form of good inflation readings. We want to see just a bit more evidence so that we can be confident.”

His comments slightly changed the probability of interest rate cuts by June of this year. According to the CME’s FedWatch tool last week there was a 14.7% probability that rates would remain at current levels in June, today the probability has gone down to 12.1%.

However, the dollar declined across the board after Chairman Powell said that continued progress on inflation “is not assured” though the central bank still expects to cut its benchmark interest rate later this year. The dollar declined by 0.42% in trading today taking the dollar index to 103.32. Dollar weakness combined with investors actively bidding gold prices to a new record closing price.

As of 5:47 PM ET gold futures basis the most active April contract is currently trading 0.93% higher up $20.00 and fixed at $2156.20. This means that dollar weakness provided just under half of today’s gains in gold with market participant's strong bullish sentiment providing the remainder of today’s gains.

Although technical studies such as stochastics and the RSI continue to show that gold is extremely overbought, traders continue to bid the precious yellow metal higher. As I addressed in yesterday’s article, these indicators have a caveat when extreme bullish market sentiment continues these studies will continue to indicate that gold is overbought offering no real insight as to when traders can expect gold prices to peak.

Wishing you as always good trading,