Federal Reserve Chairman Jerome Powell said Tuesday that “significant progress” has been made toward stabilizing prices, but the central bank needs to see improving inflation measures before cutting interest rates to stimulate the economy.
“We want to have greater confidence that inflation is declining sustainably towards 2 percent before we begin the process of easing monetary tightening,” he said at an event in Portugal on Tuesday.
The Fed has kept interest rates unchanged at 5.25% to 5.5% for almost a year as inflation remains high above the Fed’s target level of 2%.
The consumer price index fell sharply from an annual 9% increase two years ago to 3% a year ago, and has since fluctuated between 3% and 4% over the past year.
Recent inflation readings have been more encouraging for the central bank, with the personal consumption expenditures (PCE) price index falling to 2.6% in the first quarter of last year from 2.8% in the fourth quarter.
PCE was flat from April to May, declining from a 2.7% increase in April to a 2.6% increase in May.
Even as he called for improvements in inflation measures, Powell acknowledged that the economy has made progress on inflation.
“We have made considerable progress in bringing inflation down to our target, with the labour market remaining strong and growth continuing, and we hope this process will continue,” he said, adding that the economy was “now showing signs of returning to a deinflationary trend.”
Powell also noted how well the US economy performed last year despite widespread predictions of a recession, saying things had worked out “in a remarkable way” and that 2023 was “extraordinary” in terms of growth and employment.
The market expects the Fed to keep interest rates on hold at its next rate setting meeting in July, with the CME FedWatch forecasting algorithm giving it a 91.2% chance of keeping rates on hold.
For September, the outlook is more mixed, with a 31% chance of maintaining the current range and a 63.2% chance of a 0.25 percentage point cut.
