Federal Reserve Chairman Jerome Powell speaks during a news conference following a two-day closed-door meeting of the Federal Open Market Committee on the Federal Reserve's interest rate policy in Washington, D.C., on December 13, 2023.
Kevin Lamarque | Reuters
Federal Reserve Chairman Jerome Powell said Tuesday that the U.S. economy, while strong, has not seen inflation return to the central bank's target, signaling the possibility of interest rate cuts anytime soon.
Speaking at a policy forum focused on economic relations between the United States and Canada, Powell said that while inflation continues to decline, it has not moved quickly enough, and the current state of policy should remain as it is.
“The latest data shows strong growth and continued strength in the labor market, but also a lack of further progress so far this year on returning to the 2% inflation target,” the Fed chairman said during a panel discussion.
Echoing recent comments by central bank officials, Powell noted that the current level of policy is likely to remain in place until inflation approaches the target.
Since July 2023, the Fed has kept its benchmark interest rate in a target range of 5.25%-5.5%, the highest in 23 years. This was the result of 11 consecutive interest rate increases starting in March 2022.
“It is clear that the latest data has not given us greater confidence, and instead indicates that it will likely take longer than expected to achieve that confidence,” he said. “However, we believe the policy is well placed to deal with the risks we face.”
Powell added that until inflation shows further progress, “we can maintain the current level of restrictions for as long as needed.”
These comments come in the wake of inflation data during the first three months of 2024, which was higher than expected. The CPI reading for March, released last week, showed inflation running at an annual rate of 3.5% – well below the peak of around 9% in mid-2022 but drifting higher since October 2023.
Treasury yields rose as Powell spoke. Indicator Two-year notewhich is particularly sensitive to movements in the federal funds rate, briefly exceeded 5%, while the main indicator 10 year return It rose 3 basis points. The S&P 500 fluctuated after Powell's comments, turning briefly negative the day before the recovery.
10-year and 2-year returns
Powell noted that the Fed's preferred measure of inflation, the personal consumption expenditures price index, showed core inflation at 2.8% in February and little changed over the past few months.
“We said at the (Federal Open Market Committee) that we would need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy,” he said. “Clearly, the latest data has not given us greater confidence and instead suggests that it will likely take longer than expected to achieve that confidence.”
Financial markets were forced to reset their expectations for interest rate cuts this year. At the start of 2024, traders in the federal funds futures market were pricing in six or seven cuts this year, starting in March. As the data progressed, expectations shifted to one or two cuts, assuming quarter-point moves, and not starting until September.
In their last update, FOMC officials indicated in March that they expected three cuts this year. However, in recent days many policymakers have emphasized the data-driven nature of policy and have not committed to a specific level of cuts.
Correction: Powell's comments come on the heels of inflation data for the first three months of 2024 that was higher than expected. An earlier version had the year wrong.
