Fed members’ updated interest rate outlooks rock markets

Federal Reserve Chairman Jerome Powell wants to cut interest rates this year. He’s been saying it regularly all year.

But remarks from Fed officials Thursday suggested the when of rate cuts may not come as soon as many people — from home buyers and sellers to Wall Street traders — might expect.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, said it’s possible there will be no rate cuts this year.

“If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,” he said in an interview with Pensions & Investments, a trade publication.

The question of if and when rates will be cut centers on the Fed’s federal fund rate, which has been 5.25% to 5.5% since July 2023. This rate is the foundation for all U.S. interest rates.

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Complicating matters are geopolitical worries, especially reports that Iran is threatening to retaliate against Israel over an attack that killed Iranian military officials in Syria.

The result was an abrupt and nasty stock-market reversal. The Dow Jones Industrial Average gave up a 294-point gain and ended the day down more than 530 points, or 1.4% at 38,597, its biggest one-day point loss since March 22, 2023.

The Standard & Poor’s 500 Index was off 1.2%, and the Nasdaq Composite was down 1.4%.

The S&P 500 is down 2% since hitting a record closing high on March 28.

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Oil prices up, mortgage rates down

Oil prices increased sharply, and there is unease about what Friday’s U.S. report will show.

West Texas Intermediate, or WTI, the benchmark U.S. crude oil, rose $1.16 to $86.59. Rising prices add pressure to retail gasoline prices, which are now up 14% this year at $3.567, according to AAA.

A stronger-than-expected increase in key numbers could pressure markets further.

The stock sell-off sparked a rally in bonds, and interest rates were actually lower by day’s end— a clear sign that many traders wanted the safety associated with Treasuries rather than riskier stocks.

The 10-year Treasury yield dropped to 4.31% from Wednesday’s 4.355%. Mortgage rates topped 7% this year but fell back to 6.99%, according to Mortgage News Daily.

The conundrum of stubborn inflation

What’s bothering Fed officials is how sticky inflation has been lately. The Fed wants clear evidence inflation is moving toward its 2% target. And, if they don’t get the data they want, they may wait to cut rates.

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Austan Goolsby, president of the Federal Reserve Bank of Chicago, told a Chicago group he was especially worried about rising housing costs and rents.

Goolsby, nonetheless, still sees rate cuts coming, assuming inflation continues to come down. Consumer Price Index, or CPI, inflation peaked near 9% in June 2022. It was 3.2% in February.

But Tom Barkin, president of the Federal Reserve Bank of Richmond, told a group of home builders, “No one wants inflation to reemerge. We have time for the clouds to clear before beginning the process of toggling rates down.”

The day’s big decliners included Paramount Global PARA, down 8.5%, Advanced Micro Devices AMD, down 8.3%, and chip giant Nvidia (NVDA) , off 3.44%.

Gainers included GE Aerospace GE, up 1.2%, and defense contractor Lockheed Martin (LMT) , up 1.4%.