Still waiting for signs on inflation




By the close of trading on Wall Street, only the 30-stock Dow was in the green, as the broader market, represented by the S&P 500 and the tech-heavy Nasdaq, bowed to the continuing pressure from higher bond yields, a rising US dollar, and the growing realization that it is of no use trying to nudge the Fed into a rate cut.

Fed chair Jay Powell made it clear at a function on Tuesday that the central bank is still waiting for signs that US inflation is on the way down, as it was for most of 2023. Investors, analysts, economists, and anyone else with a view are starting to understand that this means "no rate cut."

This has seen some of the more juvenile economists and analysts point out that the European Central Bank could very well cut rates before the Fed starts—a silly attempt to shame the world’s most important central bank into action.

Gold stood out by rising again, ignoring rises in US bond yields and the value of the greenback. Silver, copper, and oil dipped in US trading and were lower in Asia early Wednesday.

Gold edged back over $2,400 an ounce, but not as high as Monday when it peaked at the all-time high of $2,448 an ounce. On Tuesday, the high was $2,408, and it was trading just under the $2,400 level just after 7 am Wednesday, Sydney time.

The 10-year US bond yield traded up 6.5 points to 4.67%, the two-year yield nudged over 5% and then eased back to be around 4.998%, and the value of the US dollar again rose, forcing the Aussie back to just over 64 US cents.

Powell made it clear in his remarks that while the US economy is strong (a view underlined Tuesday by an upgrade from the IMF in its latest global outlook), inflation has not returned to the central bank’s goal of 2%.

The data shows US consumer price inflation has drifted a little higher in the first three months of the year and now faces another jolt from rising energy costs (especially petrol) and other commodity prices.

The next big test comes at the end of this month with the release of the Personal Consumption Expenditure (PCE) income, spending, and inflation data, which is watched very closely by the Fed. If it shows no change in core inflation, then the chances of a rate cut will fall sharply, and the chances of a rate rise will edge upwards.

Powell said that while inflation continues to make its way lower, it hasn’t moved quickly enough, and the current state of policy should remain intact—i.e., no "rate cut looms" scenarios.

“More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal,” the Fed chief said.

“The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” he said. “That said, we think policy is well-positioned to handle the risks that we face.”

Powell added that until inflation shows more progress, “We can maintain the current level of restriction for as long as needed.”

His remarks were in contrast to those from European Central Bank head Christine Lagarde, who told CNBC separately that the bank is positioning itself for a possible cut.

“We are observing a disinflationary process that is moving according to our expectations,” Lagarde told CNBC.

“We just need to build a bit more confidence in this disinflationary process, but if it moves according to our expectations, if we don’t have a major shock in development, we are heading towards a moment where we have to moderate the restrictive monetary policy,” Lagarde said.

“As I said, subject to no development of additional shock, it will be time to moderate the restrictive monetary policy in reasonably short order,” she added.


Name Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.