On Tuesday, the US stock market showed mixed reactions following comments from Federal Reserve Chair Jerome Powell. 

Interest rates remain elevated

According to a CNN report, Powell indicated during a discussion at Wilson Center that due to the ongoing concerns about inflation not improving, it is unlikely that the central bank will reduce interest rates in the near future, specifically at its next policy meeting in two weeks, suggesting that rates will remain elevated for a longer period. 

Cryptopolitan reported that the U.S. inflation rate rose by 3.5% from March 2023 to March 2024.

It is essential to know that following Powell’s remarks, the stock market experienced fluctuations, ending the day with varied results. The Dow Jones Industrial Average saw a slight increase of 64 points, or 0.2%. In contrast, the S&P 500 declined by 0.2%, and the Nasdaq Composite dropped by 0.1%.

In the bond market, the yield on the 2-year Treasury note surged past 5% on Tuesday, only to pull back slightly, closing around 4.96%.

Federal Reserve Chairman Powell said,” The recent data have clearly not given us greater confidence that inflation is headed toward the central bank’s 2% goal.” He added, “right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us.”

Currently, interest rates have reached their highest point in 23 years following a vigorous series of increases initiated by the Federal Reserve two years ago. While inflation has significantly decreased from the highest level in forty years, seen in the summer of 2022, recent reports on inflation indicate ongoing pressure on prices, particularly in the sectors of services and housing.

Higher borrowing costs led many Americans to reduce their spending

The combination of higher borrowing costs and sustained high prices of basic necessities has led many Americans to reduce their spending. Despite this, the US economy and employment landscape remain robust, although the surge in mortgage rates has significantly slowed the real estate market.

However, data from the latest report on retail sales indicates that consumer spending has continued into the last month, presenting further proof that the economy is in a healthy state. This situation leaves the Federal Reserve with little urgency to decrease rates. Typically, the central bank would lower rates in response to a substantial weakening in the economy, as Congress tasks it with the dual mandate of ensuring stable prices and achieving maximum employment. At present, there is no indication of a rapid decline in the job market.

Powell’s remarks on Tuesday align with the sentiments previously expressed by other Federal Reserve officials, indicating that a reduction in rates is not currently on the agenda. However, the notable shift in Powell’s perspective is his observation that there has been no “additional progress” in tackling inflation, contrasting with his previous suggestion that recent inflation data might have appeared stronger due to “seasonal variations.”

Wall Street had already ruled out the possibility of a rate reduction in May, but some experts are projecting that the initial cut could occur sometime during the summer. Analysts from institutions like Goldman Sachs, JPMorgan, and Nomura are forecasting a rate cut as early as July. It remains uncertain how the Federal Reserve would communicate its intentions to reduce rates once it is convinced that inflation is on a trajectory toward 2%. The Federal Reserve employs a strategy known as “forward guidance” to inform financial markets and other stakeholders about its likely rate decisions.

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