Traders pare back their bets on rate cuts as Fed officials cautioned against easing too early.
In speeches earlier this week, Fed Governor Christopher Waller said it is "appropriate to be patient" while Governor Lisa Cook advocated for the central bank to "continue to move carefully" amid lingering inflationary risks.
Deutsche Bank Securities Chief US Economist Matthew Luzzetti told Yahoo Finance Live there's 'nothing' prompting the fed to move quickly.
"From a risk management perspective, they don't want to cut rates too early," Luzzetti explained. "They're seeing an economy that is performing well, financial conditions that are quite easy with equity markets at record high levels, so there's nothing really pushing them urgently to move."
Luzzetti added: “There is some significant uncertainty about whether or not inflation is on a down trend… They want to see additional data points to get the confidence that inflation is going back to 2% before they begin to cut rates.”
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
BRAD SMITH: If Federal Reserve speakers this week, they were maintaining a cautious approach to cutting interest rates echoing the minutes released on Wednesday. Now this comes as a reaction to January data showing inflation stayed unexpectedly high pushing back hope of that first rate cut to June. So let's bring in Matthew Luzzetti who is the Deutsche Bank Securities Chief US economist to discuss more. Matthew, always a great pleasure to get some of your insights here.
First and foremost, I mean, we were thinking May, now we're pushed back to June. We actually had Brad McMillan on here with us earlier. He said, you might want to take the probability of a cut just off the table this year. What are some of the readings shifting in terms of your stance?
MATTHEW LUZZETTI: Yeah. We've been expecting that the Fed would cut rates in June. And I think certainly the recent communications that we've gotten from Fed officials, which are right have leaned hawkish, have supported that. I think when you look at some of the Fed officials, certainly Vice Chair Jefferson yesterday, Governor Waller yesterday evening, they're looking at the data earlier this year. A strong jobs report, very strong jobs report.
A big pickup in inflation, a stronger than expected Q4 GDP report. I think they're concluding two things. One, there's no urgency to cut rates, the economy is performing well. Why do they need to ease back on monetary policy restraint given that? And two, there is some more significant uncertainty about whether or not inflation is on a downtrend. We got that strong January inflation report.
And so they want to see additional data points really to get confidence that inflation is going back to 2% before they begin to cut rates. We agree I think that that likely happens at the June meeting.
SEANA SMITH: Matt, what did you make of those two reports that we just got? Are you still confident that inflation is cooling despite those blips.
MATTHEW LUZZETTI: Yeah. I think that there was a number of idiosyncrasies within the data. So owners equivalent rent within the shelter component was very strong within the January data after showing this clear downtrend. I actually do have decent confidence that is going to reverse and over the next year shelter inflation comes down. We know from all these private sector estimates that they've inflated very materially and actually in some of those estimates are in deflationary territory.
So I think some of that will come down. Other components, portfolio management within the PCE, inflation gauge actually tracks the market. So as markets move substantially higher, it leads to inflationary pressures, but that's just a transitory story. So we still do have reasonable confidence that inflation will come down over the course of this year. But I think you do have to acknowledge at the same time.
You've got a strong print and there's some greater uncertainty around that.
BRAD SMITH: What type of-- and when we think about that trend that we're trying to watch so closely to see if and when it's locked in. Even if we did see that trend get locked in, how quickly would the Fed feel the propensity to need to cut as long as that trend is remaining in line with moving towards their target.
MATTHEW LUZZETTI: Yeah. I think they've signaled that from a risk management perspective. They don't want to cut rates too early. They're seeing an economy that is performing well, financial conditions that are quite easy with equity markets at record high levels. So there's nothing really pushing them urgently to move. At the same time, they do believe that policy is restrictive.
We do see some of the stresses that may cause either through regional banks or CRA or consumer delinquency rates rising. And so I think from the Fed's perspective, they have what looks like a soft landing in hand. And they are still concerned that if they don't begin to ease policy somewhat, at least over the coming meetings that they could potentially jeopardize that.
And that if it transpires into something that's a little bit more adverse and then perhaps you get a mild recession. And so I think the Fed does see a strong case to cut rates. But clearly at the moment with a stronger economy, there's nothing urgently pushing them in that direction over the next few months.
SEANA SMITH: Matt, even if the economy is able to hold up relatively well, what do you think the impact is going to be on the labor market if we do see the higher for longer interest rate approach take hold?
MATTHEW LUZZETTI: Yeah. I think you've seen the market reprice tremendously, the Fed. We were pricing not too long ago about 160 basis points of rate cuts. We're now down closer to 75 basis points, which is what the Fed was signaling at the December meeting. And despite that, markets have taken them quite well. Equity markets are at record high levels credit. Spreads are still tight volatility is still low.
Yields have moved higher but it hasn't really spilled over into broader financial conditions. And so I think that does create uncertainty. Even if you see the Fed being more cautious here, as long as the economy looks resilient, as long as the underlying economy and fundamentals look strong, then it's not obvious that pushing out rate cuts has a material negative impact on the labor market.
SEANA SMITH: All right. Matt Mazzetti, always great to get your insight here. Thanks so much for joining us here this morning. Deutsche Bank Securities Chief US economist.
