WASHINGTON (AP) — Inflation in the United States is slowing again after higher readings earlier this year, Federal Reserve Chair Jerome Powell said Tuesday, while adding that more such evidence would be needed before the Fed would cut interest rates.
After some persistently high inflation reports at the start of 2024, Powell said, the data for April and May “do suggest we are getting back on a disinflationary path.”
Speaking in a panel discussion at the European Central Bank’s monetary policy conference in Sintra, Portugal, Powell said Fed officials still want to see annual price growth slow further toward their 2% target before they would feel confident of having fully defeated high inflation.
“We just want to understand that the levels that we’re seeing are a true reading of underlying inflation,” he added.
Powell also acknowledged that the Fed is treading a fine line as it weighs when to cut its benchmark interest rate, which it raised 11 times from March 2022 through July 2023 to its current level of 5.3%. The rate hikes were intended to curb the worst streak of inflation in four decades by slowing borrowing and spending by consumers and businesses. Inflation did tumble from its peak in 2022 yet still remains elevated.
If the Fed cuts rates too soon, Powell cautioned, inflation could re-accelerate, forcing the policymakers to reverse course and impose punishing rate hikes. But if the Fed waits too long to reduce borrowing costs, it risks weakening the economy so much as to potentially cause a recession.
“Getting the balance on monetary policy right during this critical period — that’s really what I think about in the wee hours,” Powell said in response to a question about his top worries.
On Friday, the government reported that consumer prices, according to the Fed’s preferred measure, were unchanged from April to May, the mildest such reading in more than four years. And compared with a year earlier, inflation dropped to just 2.6% in May, from 2.7% in April, the government said.
Excluding volatile food and energy costs, “core” prices also barely rose from April to May. On a year-over-year basis, core inflation fell to 2.6% from 2.8% in April. The latest inflation figures were a sharp improvement from early this year.
In his appearance Tuesday, Powell said the U.S. economy and job market remain fundamentally healthy, which means the Fed can take its time in deciding when rate cuts are appropriate. Most economists think the Fed’s first rate cut will occur in September, with potentially another cut to follow by year’s end.
The Fed chair also said the job market is “cooling off appropriately,” which likely means that it won’t heighten inflationary pressures through rapid wage gains.
“It doesn’t look like it’s heating up or presenting a big problem for inflation going forward,” Powell said of the job market. “It looks like it’s doing just what you would want it to do, which is to cool off over time.”
Powell declined to signal any time frame for a rate cut. Investors are betting that there is nearly a 70% chance for a reduction at the Fed’s meeting in September.
Fed officials have expressed a range of views on inflation and interest-rate policy since their last meeting a little over two weeks ago.
John Williams, president of the Federal Reserve Bank of New York and vice chair of the central bank’s rate-setting committee, said last week, “I am confident that we at the Fed are on a path to achieving our 2% inflation goal on a sustained basis.”
Mary Daly, president of the San Francisco Fed, cautioned last week, though, that it was “hard to know if we are truly on track to sustainable price stability.”
In his appearance Tuesday in Portugal, Powell spoke at a panel along with Christine Lagarde, president of the European Central Bank, and Roberto Campos Neto, the head of Brazil’s central bank.
The ECB has already made a quarter-point cut to its key rate this year, with inflation in the 20-nation eurozone having sunk from above 10% to just 2.5%.
In her remarks Tuesday, though, Lagarde reiterated that the ECB is not on any “predetermined path” and that its recent rate cut “would be followed by further review of data.”
Such comments have led many analysts to conclude that the ECB’s next rate cut won’t occur until September at the earliest.
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Rephrased content:
In the United States, Federal Reserve Chair Jerome Powell stated that inflation is decelerating once more following higher readings earlier this year. Powell emphasized that the Fed would require more evidence of this trend before considering a cut in interest rates.
While initially facing persistently high inflation at the start of 2024, Powell indicated that the April and May data suggest that the country is returning to a disinflationary path. The Fed aims to see annual price growth decrease further towards their 2% target to confirm the defeat of high inflation.
Powell acknowledged the delicate position the Fed is in as it contemplates when to reduce its benchmark interest rate, which was raised 11 times between March 2022 and July 2023 to its current level of 5.3%. This series of rate hikes was implemented to combat the most severe inflationary period in four decades by slowing down borrowing and spending by consumers and businesses. Although inflation has decreased from its peak in 2022, it remains elevated.
Powell highlighted the challenge of finding the right balance in monetary policy to avoid either a resurgence of inflation or a weakening economy that could potentially lead to a recession. He underlined the importance of getting the timing right to prevent having to reverse policies or inflict harsh rate hikes.
The most recent government report indicated that consumer prices, based on the Fed’s preferred measure, remained stable from April to May, the lowest increase in over four years. Year-over-year inflation dropped to 2.6% in May from 2.7% in April. Excluding volatile food and energy costs, core prices showed minimal growth from April to May, with core inflation decreasing to 2.6% from 2.8% in April.
During his appearance, Powell expressed confidence in the solid state of the U.S. economy and job market, allowing the Fed the flexibility to carefully decide on when to implement rate cuts. While many economists anticipate the first rate reduction by the Fed to take place in September, Powell did not provide a specific timeframe for the potential cut.
He mentioned that the job market is appropriately cooling off, which is expected to prevent rapid wage growth that could fuel inflation. Powell did not indicate a time frame for a rate cut, but investors are speculating on a near 70% likelihood of a reduction at the Fed’s September meeting. Various Fed officials hold different perspectives on inflation and interest-rate policy, with some expressing confidence in achieving the 2% inflation goal and others more cautious about sustainable price stability.
At the European Central Bank’s monetary policy conference in Portugal, Powell participated in a panel discussion alongside Christine Lagarde, the ECB President, and Roberto Campos Neto, the head of Brazil’s central bank. The ECB already reduced its key rate by a quarter point this year, with inflation in the eurozone dropping from over 10% to 2.5%. Lagarde emphasized that the ECB is not bound to a predetermined course, hinting that any future rate cut would depend on further data review. Analysts anticipate that the ECB’s next rate cut may not occur until at least September based on these statements.
