Federal Reserve Chair Jerome Powell expressed satisfaction with the recent downtrend in inflation following an earlier rebound at the start of the year. However, he cautioned that it was too early to predict whether the central bank might lower interest rates by the end of the summer, despite rising investor expectations.
“We’ve made a lot of progress,” Powell remarked Tuesday during a panel with other central bankers at a conference in Portugal. He noted that the labor market, which faced severe shortages and sharp wage increases two years ago, has now moved toward a “pretty substantial” balance.
Powell’s comments conveyed cautious optimism, which had waned after disappointing inflation data in April. He noted the economy’s “significant progress,” “real progress,” and “quite a bit of progress” toward reducing inflation while maintaining stable growth.
Despite this, Powell maintained a cautious stance on rate cuts, indicating that a reduction at the central bank’s upcoming meeting later this month is unlikely. Fed officials remain wary of premature cuts following unexpectedly high price increases at the beginning of the year.
“We want to be more confident that inflation is moving sustainably down,” Powell said. “We want to understand that the levels we’re seeing are a true reflection of underlying inflation.”
Economic projections released last month show that most Fed officials anticipate cutting interest rates once or twice this year if inflation slows and growth remains steady but modest. The next meeting is scheduled for July 30-31, where rates are expected to be held steady at their highest level in over two decades. Markets are keen to see if officials will set the stage for a rate cut at the September meeting.
Officials will have three more months of data on hiring, inflation, and spending before the September meeting, making it challenging to make definitive decisions now. Powell refrained from committing to a specific date for a potential rate cut. “I’m not going to be landing on any specific dates here today,” he stated.
According to CME Group, investors in interest-rate futures markets see roughly a 70% chance of the first Fed cut by September. U.S. stock indexes rose on Tuesday, with the S&P 500 and Nasdaq Composite reaching record highs.
To decide on lowering interest rates, officials must balance two risks: the potential acceleration of labor market cooling, which could become difficult to reverse, and the possibility that lower rates could spur economic activity, leading to inflation exceeding the Fed’s target.
Inflation fell to 2.6% in May, based on the Fed’s preferred gauge, down from 4% a year earlier but still above the 2% target.
Fed officials believe they can afford to wait on cutting interest rates as long as the labor market remains healthy. While payroll growth has been solid this year, there are signs that consumer spending is slowing, aligning with long-held expectations. “It’s very much understood by us that we have two-sided risks,” Powell said.
The Fed raised rates at the fastest pace in 40 years in 2022 and 2023 to combat inflation, which had also reached a four-decade high. They have maintained their benchmark rate between 5.25% and 5.5% since last July.
Officials were surprised by the rapid slowdown in price growth in the latter half of last year, despite strong spending and hiring. This led them to shift their focus from how high to raise rates to how long to wait before cutting them. Inflation’s subsequent reversal disrupted expectations from both investors and the Fed that rates could have been cut by now.
Powell downplayed concerns about persistent services inflation, suggesting that some components, such as housing, reflect lagged price increases that may not mirror current supply-and-demand dynamics.
Instead, Powell emphasized labor market conditions and wages, which have gradually slowed in a way that satisfies Fed leaders. “You can see the labor market is cooling off, appropriately so, and we’re watching it very carefully,” he said. Powell reiterated that a sudden decline in employment growth could prompt quicker rate cuts.
