Federal Reserve Chairman Jerome H. Powell reiterated that policymakers were prepared to keep interest rates stable at high levels while waiting for signs of further slowing inflation.
At the start of 2024, Fed officials expected to cut interest rates after sharply raising borrowing costs to a more than two-decade high of 5.3 percent between 2022 and the middle of last year. But stubbornly high inflation in recent months has scuppered this plan.
Central bankers have made clear that rate cuts are still possible this year, but have also signaled that they plan to keep interest rates on hold for now while they wait to ensure that inflation truly comes under control.
During a panel discussion in Amsterdam, Mr Powell said officials had been surprised by the recent inflation readings. The Consumer Price Index measure of inflation, due to be released on Wednesday, fell rapidly in 2023 but remained stuck above 3 percent this year. The Fed’s preferred index, the personal consumption expenditures index, is slightly cooler but remains well above the Fed’s inflation target of 2 percent.
“We didn’t expect this to be a smooth ride, but these were higher than I think anyone expected,” Powell said Tuesday of the latest inflation readings. “This showed us that we have to be patient and let the restrictive policies do their work.”
Mr. Powell said he expects continued growth and a strong labor market in the coming months and believes inflation will slow again.
But, he said, “my confidence is not as high as it was before after seeing these metrics in the first three months of the year.”
The Fed chairman made it clear that further interest rate hikes were not expected, although not impossible. He said there was a “very low probability” that the Fed would have to consider raising rates again, but he didn’t think that was the most likely outcome.
“It’s really about keeping policy at the current interest rate for longer than expected,” Powell said. “The question is: Is it sufficiently restrictive, and I think that will be a question that time will tell.”
The Fed chairman said he still expects rent, a key driver of recent inflation, to ultimately push down price increases. However, he admitted that the slowdown is taking longer than expected.
He also noted that the policy could take longer to work this time, in part because homeowners and businesses have locked in very low interest rates than borrowing costs in the 2010s and in 2020 were low point.
“The U.S. economy is different this time,” Powell said.
Still, he has said repeatedly that he believes interest rates are high enough to gradually weigh on growth and eventually bring inflation down for good.
“Initially we were very concerned that the very high inflation we were seeing would be difficult to bring down without there being a significant decline in employment and a slowdown in economic activity – that hasn’t happened, that’s just a great thing Result,” said Mr Powell.
Even though inflation has fallen significantly from its 2022 highs, Americans are dissatisfied with the state of the economy, as evidenced by low consumer confidence. Mr Powell attributed this dissatisfaction to the persistently high price levels.
Since inflation measures price changes, slower inflation only means that prices will stop rising as quickly, not that they will fall after their rapid rise in 2021 and 2022.
“You tell people, ‘Inflation is going down,’ and they think, ‘I don’t understand that,'” Powell said. “People at the lower end of the income spectrum in particular are hit hard by inflation right from the start, which is why we are committed to restoring and maintaining price stability.”
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2024-05-14 18:40:47
www.nytimes.com
