Even if the U.S. economy is doing well overall, inflation has not returned to the central bank’s target, according to Federal Reserve Chair Jerome Powell’s remarks on Tuesday. This further reduces the possibility that interest rate reduction will occur anytime soon.
Speaking at a policy event on the economic relationship between the United States and Canada, Powell stated that although inflation is still declining, it hasn’t done so quickly enough, and the status quo of policy should be maintained.
During a panel discussion, the Fed chairman stated, “More recent data shows solid growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to our 2% inflation goal.”
Powell said that until inflation approaches the target, the current level of policy will probably remain in place, echoing recent remarks made by central bank officials.
The Federal Reserve has maintained its benchmark interest rate at its highest level in 23 years, between 5.25% and 5.5%, since July 2023. That was the outcome of 11 rate increases in a row, starting in March 2022.
He stated, “The recent data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence. That said, we think policy is well positioned to handle the risks that we face.”
Powell continued, saying, “We can maintain the current level of restriction for as long as needed” until inflation shows greater improvement.
The remarks are based on inflation data that was higher than anticipated for the first three months of 2024. The Consumer Price Index for March of last week revealed an annual rate of inflation of 3.5%, which is significantly lower than the peak of around 9% in mid-2022 but has been gradually rising since- October 2023.
Bond rates increased during Powell’s speech. The benchmark 10-year yield increased 3 basis points, while the benchmark 2-year note—which is particularly vulnerable to changes in the Federal Reserve rate—briefly crossed the 5% level. Following Powell’s comments, the S&P 500 faltered and briefly went negative on the day before rising again.
Powell pointed out that core inflation was 2.8% in February according to the personal consumption expenditures price index, the Fed’s preferred inflation measure, and that it hasn’t changed much in the previous few months.
“We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably towards 2% before [it will be] appropriate to ease policy,” he said. “The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.”
The expectations of the financial markets for rate reduction this year have had to be adjusted. Fed funds futures market traders were pricing in six or seven cuts for 2024 at the beginning of the year, beginning in March. As the statistics have developed, the projections have changed to one or two cuts, assuming quarter-percentage-point movements, and a September start date.
FOMC representatives stated in March that they anticipate three cuts this year in their most recent statement. But recently, a number of politicians have emphasized how data-dependent policies are and have refrained from committing to a specific level of reductions.