While most S&P/ASX 200 Index (ASX: XJO) investors were snug in their beds, United States Federal Reserve chair Jerome Powell offered some valuable insights into when we might expect the world's most influential central bank to begin cutting interest rates.
The current Fed tightening cycle kicked off back in March 2022 as 'stubbornly absent' inflation reappeared with a vengeance.
Following a rapid series of rate hikes, the official target range for the benchmark federal funds rate now stands at 20-year highs of 5.25% to 5.50%. A level it's been at since July.
ASX investors have also had to cope with multiple rate increase from the Reserve Bank of Australia. That's seen the Aussie cash rate rocket from 0.10% in May 2022 to the current 4.35%.
Now, here's what we learned from Powell overnight.
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ASX investors will need to be 'patient'
ASX investors hoping for multiple Fed interest rate cuts over the coming months will likely be left wanting.
Yesterday, the Federal Open Market Committee (FOMC) voted unanimously to leave the benchmark rate unchanged. That comes as the US economy continues to outperform expectations, with a tight labour market among the factors keeping inflation above the Fed's 2% target level.
Addressing the prospects of interest rate cuts, Powell said (quoted by Bloomberg), "So far this year, the data have not given us that greater confidence in particular."
He added that, "Readings on inflation have come in above expectations. It is likely that gaining such greater confidence will take longer than previously expected."
According to Powell:
If we did have a path where inflation proves more persistent than expected and the labour market remains strong, but inflation is moving sideways, and we're not gaining greater confidence, well, that would be a case in which it can be appropriate to hold off on rate cuts.
So what should international and ASX investors do?
"We can be patient," Powell said.
On the brighter side, the Fed chair appeared to dismiss growing jitters about further potential interest rate rises.
"We don't see evidence supporting that conclusion," Powell said. "I think it's unlikely that the next policy rate move will be a hike."
What was missing to help spur a rebound in US markets and a potential rally for ASX investors today were some words Powell had said after prior meetings. Namely, that interest rate cuts were likely in 2024.
What are the experts saying?
Economists at Commonwealth Bank of Australia (ASX: CBA) said ASX investors were looking at delayed rate cuts from the Fed rather than no cuts at all.
According to CBA's economists (quoted by The Australian Financial Review):
In his press conference, chair Powell pointed out rate cuts are not yet appropriate. However, Powell stopped short of signalling rate cuts were likely this year or that rates were at a peak, which he had said previously. We interpret Powell's comments as rate cuts are delayed not derailed.
Fitch Ratings chief economist Brian Coulton added, "We have now had a string of three bad inflation prints and three bad wage releases."
Coulton said:
With unemployment still low and the labour market still tight, there is only a limited risk to the Fed's employment mandate from waiting longer before embarking on rate cuts.
On the other hand, the risk of failing to get inflation down on a sustained basis seems to be rising as each week goes by.
As for what ASX investors can expect on the home front, the RBA meets again next Tuesday, 7 May. Australia's central bank is also widely expected to keep rates on hold for now.
