Fed Monetary Policy Consideration: Anticipation of a Single Interest Rate Decrease in 2020 Amidst Trump's Pressure on Powell
As the year 2022 progressed, both the Federal Reserve and market participants showed a cautious approach towards interest rate cuts, with a general consensus that immediate reductions were unlikely.
Federal Reserve Chair Jerome Powell and other officials signalled their reluctance to cut rates in 2022, emphasising the persistence of inflation and the need to maintain restrictive monetary policy despite political and market pressures to ease. They indicated that rate cuts were more probable later, potentially in 2023 or beyond, rather than immediately in 2022.
Market expectations as of mid-2022 did not foresee cuts before at least late 2022 or beyond. Futures markets and FedWatch tools indicated the first rate cuts would likely start only in the second half of 2023 or later. While some experts anticipated cuts could begin by September or December 2022, this view was not universal, and more cautious voices predicted no cuts until 2023 or 2024.
Economic data and inflation trends played a crucial role in shaping expectations. Despite signs of slowing economic growth, inflation remained elevated and above the Fed’s target, limiting the Fed's scope to cut rates without risking its credibility. Surveys of consumer inflation expectations showed a still relatively high inflation outlook, which factored into the Fed's hesitancy to reverse tightening quickly.
The Treasury Secretary in 2022 expressed confidence that the Fed would lower rates by September at the latest, reflecting some degree of market and government expectation for easing by the end of 2022. However, this prediction was tempered by the complex economic environment and the Fed's commitment to controlling inflation.
As of the current month, market participants largely expect another pause at the Fed's meeting. However, they appear to be split on how things will proceed for the remainder of the year. The percentage expecting no cuts decreased by 10 percentage points month-on-month, while the percentage expecting one rate cut is 25 percentage points higher than at the start of the year.
In summary, as of 2022, both market participants and Fed officials broadly agreed that immediate interest rate cuts were unlikely. The first cuts were expected more realistically from late 2023 onwards, depending on how inflation and economic conditions evolved. The Fed prioritised price stability over easing in 2022, indicating a cautious approach to any rate reductions that year.
The Federal Reserve's cautious approach towards immediate interest rate cuts in 2022 was influenced by both the persistence of inflation and the need to maintain a restrictive monetary policy, despite the potential political and business pressures for easing. Market participants, on the other hand, anticipate the first rate cuts to start in the second half of 2023 or later, with some experts predicting that these cuts might begin as late as 2023 or 2024, signifying a general consensus between finance and business sectors, as well as politics and general news, that delayed rate cuts are more probable in the coming years.
