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Fed’s Powell urges prudence on interest rate cuts; German exports fall sharply

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Today's agenda

America’s top central banker has pushed back against expectations of a flurry of interest rate cuts this year, while flagging that borrowing costs will be lowered at some point in 2024.

Jerome Powell, head of the US Federal Reserve, told CBS’s 60 Minutes that the Fed was alert to the danger of moving too soon and cutting rates before inflation was fully tamed.

He warned: 'The danger of moving too soon is that the job’s not quite done, and that the really good readings we’ve had for the last six months somehow turn out not to be a true indicator of where inflation’s heading. We don’t think that’s the case. But the prudent thing to do is to, is to just give it some time and see that the data continue to confirm that inflation is moving down to 2% in a sustainable way.'

US CPI inflation was recorded at 3.4% a year in December, above the Fed’s target of 2%, but down on the 6.5% recorded in December 2022. The Fed sets its key rate at 5.25% to 5.5%, the highest since 2001, and many investors – and borrowers – are keen to see it cut.

Powell explained that the US Fed must balance the risks of moving too soon, versus reacting too late.

US bond prices are falling after Powell's comments, pushing up the yield (the rate of return) on US 10-year Treasury bonds by 5 basis points to 4.08%, from 4.03% on Friday night. That suggests bond traders are dialling back expectations for interest rates cuts this year.

Powell told 60 Minutes that 'almost every single person' on the Fed’s open market committee believes it will be appropriate to reduce interest rates this year. He indicated that policymakers are sticking with their forecast last December that they will make three quarter-point cuts to rates in 2024.

Powell said the Fed would issue new forecasts at its next meeting in March, but added: 'Nothing has happened in the meantime that would lead me to think that people would dramatically change their forecasts.'

Powell also said it is 'not likely' that the FOMC would feel confident enough to cut rates in March. The financial markets are anticipating at least five rate cuts in 2024, although the odds of a cut in March fell further last Friday after a surprisingly strong US jobs report.

Germany’s manufacturers have suffered a sharp fall in exports, as concerns over the health of Europe’s largest economy mount. Exports fell 4.6% month-on-month in December, and were also 4.6% lower than a year ago, new figures from the federal statistics body show.

The fall in exports was broad-based; sales to other eurozone countries fell by 5.5% month-on-month, compared with a 3.5% drop in exports to the rest of the world. Destatis reports: 'Most German exports went to the US in December 2023. After calendar and seasonally adjusted adjustments, 5.5% fewer goods were exported there than in November 2023.'

German imports also dropped, indicating weakening domestic demand. Last month at Davos, Germany’s finance minister denied Germany was the “sick man of Europe.” Instead, Christian Lindner insisted Germany was “a tired man after a short night,” who needed a “good cup of coffee“ – in the shape of structural reforms.

Germany is on the brink of recession, after shrinking by 0.3% in the fourth quarter of 2023. Its economy has barely grown over the last year, hit by high energy costs, while its car sector has become too reliant on China – as covered here:

Also coming up
• 9am GMT: UK car sales for January
• 9am GMT: Eurozone services PMI for January
• 9.30am GMT: UK services PMI for January
• 10am GMT: OECD to release Interim Economic Outlook
• 2.45pm GMT: US services PMI for January

We’ll be tracking all the main events throughout the day ...

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