• Federal Reserve Chair Jerome Powell (POW) indicated that near-term inflation expectations have increased in recent months, while longer-run measures remain anchored near the 2% target.
  • The shift suggests the Fed may adopt a more cautious approach to rate cuts, potentially delaying easing until data shows sustained progress on inflation.
  • Markets are pricing in higher short-term rates, impacting bond yields and sector leadership, with analysts watching for spillover effects on consumer prices and global capital flows.

Powell's remarks on inflation expectations

Federal Reserve Chair Jerome Powell said Thursday that near-term inflation expectations have risen, according to people familiar with his recent comments. In a speech at a policy forum, Powell stressed that while short-run price pressures have firmed, longer-term expectations remain well-anchored near the Fed's 2% goal.

"Near-term measures have moved up, but we see no de-anchoring at longer horizons," Powell said, according to an attendee. The Fed chair did not specify the magnitude of the rise but noted that tariff-related costs and energy volatility were contributing factors. The Fed declined to comment further when reached.

Implications for monetary policy

The acknowledgment of firmer near-term expectations complicates the Fed's path to rate cuts. Investors had anticipated a pivot toward easing in the second half of the year, but Powell's remarks suggest the central bank will require clearer evidence that inflation is sustainably declining before loosening policy.

"This reinforces our view that the first cut won't come until September at the earliest," said a senior economist at a major investment bank, who asked not to be named discussing internal forecasts. Market-implied probabilities for a June rate cut fell to 45% from 55% following the news, according to CME FedWatch data.

Market reaction and broader context

Bond yields rose modestly after Powell's comments, with the two-year Treasury note climbing 5 basis points to 4.72%. Equity markets showed mixed reactions, with rate-sensitive sectors like utilities and real estate underperforming. The S&P 500 was little changed in afternoon trading.

The rise in near-term expectations echoes episodes during the 2018-2019 trade war, when tariff-driven price hikes briefly pushed up inflation gauges. Economists caution that the current uptick may prove transitory if supply chains adjust and energy prices stabilize. However, with services inflation still sticky, the Fed faces a delicate balancing act.

"Near-term expectations are a noisy signal, but Powell is right to highlight them," said a former Fed staffer now at a think tank. "If they persist, it could delay rate cuts and keep financial conditions tighter for longer."

What to watch next

Investors will scrutinize upcoming data releases, including the March personal consumption expenditures price index due April 26, and the University of Michigan's consumer sentiment survey, which includes 5-10 year inflation expectations. Powell's next public appearance is at the Federal Open Market Committee's May 1 decision, where the Fed is expected to hold rates steady.

Correction: An earlier version of this article misstated the timing of the next FOMC meeting. It is May 1, not April 30. The article has been updated.