Fed chair Jerome Powell maintains wait-and-see posture on inflation and rates
Summary
The Fed chief said he expected inflation to continue heading lower but that he was less confident than he had previously been about that outlook.
Federal Reserve Chair Jerome Powell affirmed the central bank’s plans to hold interest rates at the highest level in more than two decades as it awaits evidence that a slowdown in inflation will resume after setbacks this year.
Powell said he expected inflation to continue heading lower but that he was less confident than he had previously been about that outlook, leaving the Fed unable to say whether or when it might be able to lower interest rates.
“We’re just going to have to see where the inflation data fall out," he said during a moderated discussion in Amsterdam on Tuesday.
Fed officials began 2024 optimistic that they would be able to soon lower rates from their highest level in two decades. After a series of cooler inflation readings in late 2023, it seemed possible that just one or two more months would make officials confident that inflation would reach their 2% target before too long and allow them to begin reducing rates.
Then came three successive disappointing inflation reports, leading Powell and his colleagues to effectively hit the reset button.
“We did not expect this to be a smooth road," but recent readings were even higher than anticipated, Powell said Tuesday. The Fed leader said he still anticipated interest rates were high enough to slow demand and bring inflation down, meaning the Fed will need to “be patient and let restrictive policy do its work."
Most officials have indicated that they don’t anticipate the central bank will need to resume interest rate increases. Since last raising rates in July, officials have held their benchmark federal-funds rate steady in a range between 5.25% and 5.5%, the highest in two decades.
Powell had indicated in recent weeks that the central bank would keep interest rates at the current level for even longer if inflation failed to subside in the months ahead. The Fed could cut rates if the labor market weakened unexpectedly, he said.
A measure of inflation that strips out volatile food and energy prices stood at 2.8% in March from a year earlier, down from 4.8% in March 2023. But the 12-month measure masks the more recent setbacks: Over the six months through March, prices rose at an annualized 3.0% rate, up from 1.9% for the six months ending in December. The Fed targets 2% inflation over time.
A key piece of data will come Wednesday, when the Labor Department reports the consumer-price index for April. A measure of producer prices for last month, reported Tuesday before Powell’s speech, had mixed implications for the Fed’s preferred gauge, which will be released later this month.
Meanwhile, the unemployment rate has edged up over the past year to 3.9% in April, from 3.4% one year earlier. Job growth has been steady and economic activity has been stronger than anticipated, partly reflecting increases in immigration.
The stakes are high for Fed officials, who are trying to navigate two risks after conducting over the last two years the most aggressive series of interest rate increases in four decades. One is that they ease too soon, allowing inflation to become entrenched at a level above their 2% target. The other is that they wait until the labor market crumples under the weight of higher rates.
Write to Nick Timiraos at Nick.Timiraos@wsj.com
