What Will It Take for the Fed to Lower Rates?

The wait continues

Global markets are still processing the probability that U.S. interest rates will remain higher for longer, as the Fed acknowledges that high inflation has forced it into a holding pattern on interest rates.

That's putting new emphasis on Friday's jobs report, as Wall Street and policymakers look for clues on how the labor market is affecting inflation and the wider economy.

U.S. futures are pointing to a modest rise after stocks in some parts of Asia and Europe sank. That came after a topsy-turvy final hour of trading on Wednesday in New York: The S&P 500 surged when Jay Powell, the Fed chair, said during his news conference that an interest-rate increase was "unlikely" — only to plunge when he backed away from offering clear guidance on when cuts may be coming.

The Fed needs "greater confidence" that inflation is headed down, Powell said, citing the central bank's longstanding target of 2 percent. (That level remains the subject of persistent debate.) But, if anything, price data has shown inflation rising since the start of the year.

At the same time, consumer sentiment has fallen, with bellwether companies including Starbucks and McDonald's reporting disappointing first-quarter sales. "Everybody's fighting for fewer consumers or consumers that are certainly visiting less frequently," Ian Borden, McDonald's C.F.O., told analysts on Tuesday.

Other takeaways from Powell's comments:

• He thinks that inflation will creep down "over the course of this year." But that's still not enough conviction for the Fed to be more specific about its outlook on cuts.

• The futures market on Thursday was penciling in 0.35 percentage points' worth of cuts this year to the Fed's prime lending rate, compared with predictions in January that the central bank would lower by more than 1.5 percentage points.

• Powell does not see a risk of stagflation. The economy is growing at roughly 3 percent and the inflation rate is under 3 percent over the past year, he said, adding, "I don't see the stag, or the flation."

Friday's nonfarm payrolls report is in the spotlight. Economists forecast that employers added 233,000 jobs last month, keeping the unemployment rate steady at 3.8 percent. That's despite some headline-grabbing layoffs in recent weeks at Alphabet, Tesla and Apple.

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