Inflation in the United States is slowing again after higher readings earlier this year, Federal Reserve Chairman Jerome Powell said Tuesday, adding that more such evidence would be needed before the Fed cuts interest rates.
After some reports of persistently high inflation in early 2024, Powell said, the data for April and May “do suggest that we are returning to a disinflationary path.”
Speaking at a monetary policy conference in Sintra, Portugal, the head of the U.S. central bank indicated that Fed officials still want to see annual price growth slow further toward their 2% target before they feel confident they have fully defeated high inflation.
“We just want to understand that the levels we are seeing are a true reading of underlying inflation,” he added. Unlike headline inflation, core inflation does not include volatile food and fuel prices.
Powell also acknowledged that the Fed is in a delicate position as it weighs when to cut its benchmark interest rate, which has risen 11 times from March 2022 to July 2023 to its current level of 5.3%.
The rate hikes were intended to stem the worst run of inflation in four decades by curbing borrowing and spending by consumers and businesses. Inflation has fallen from its 2022 peak but remains elevated.
If the Federal Reserve cuts interest rates too soon, Powell warned, inflation could accelerate again, forcing Fed officials to backtrack and impose sharp rate hikes. But if the Fed waits too long to cut borrowing costs, it risks weakening the economy so much that it could trigger a recession.
“Getting the balance right on monetary policy during this critical period is really what I’m thinking about in the wee hours of the morning,” Powell said in response to a question about his top concerns.
On Friday, the U.S. government reported that consumer prices, a closely watched indicator by the Federal Reserve, were unchanged from April to May, the softest reading in more than four years. And compared with a year earlier, inflation fell to 2.6% in May from 2.7% in April, according to the government.
Excluding volatile food and energy costs, core prices also barely rose from April to May. On a year-on-year basis, core inflation fell to 2.6% from 2.8% in April. The latest inflation figures marked a sharp improvement from the start of the year.
Speaking at a meeting on Tuesday, Powell said the U.S. economy and labor market remain healthy, meaning the Fed can take its time in deciding when it’s appropriate to cut rates.
Most economists believe the Fed’s first rate cut will come in September, with another cut possible later in the year.
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