Fed chief warns of delayed start to rate cut cycle amid lack of progress on inflation
▶ Recent US data has not given regulator ‘greater confidence’ to start easing restrictive policy, Powell says
Federal Reserve chairman Jerome Powell said he expects recent US data to delay the timing of interest rate cuts after figures indicated the central bank’s fight to restore price stability has stalled.
The Fed has held its target range between 5.25 per cent and 5.50 per cent since the summer and is now considering the timing of cutting interest rates.
Economic data since January has shown the Fed’s path to get inflation closer to its 2 per cent target has been bumpy, indicating that central banks in countries such as the UAE and Saudi Arabia, will maintain restrictive stances as well.
“The recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence,” Mr Powell said during a discussion at the Wilson Centre’s Washington Forum on the Canadian Economy.
“That said, we think policy is well positioned to handle the risks that we face … if higher inflation does persist we can maintain the current level of restriction for as long as needed.”
The Fed chairman was speaking on the Personal Consumption Expenditures price index, the central bank’s preferred inflation metric.
PCE inflation remained at 2.8 per cent on a yearly basis, and Mr Powell said the three and six-month measures “are actually above that level”.
Last week’s consumer price index also delivered a blow to a potential June rate cut.
The CPI report, which showed headline inflation rising to 3.5 per cent annually, was enough to make traders downgrade their forecasts from three quarter-point cuts this year to two.
Mr Powell said there is “significant space to ease” should the US see a sudden sharp rise in unemployment due to the Fed holding steady for too long.
“Right now, given the strength of the labour market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us,” he said.
Mr Powell and Tiff Macklem, governor of the central bank of Canada, both noted the synchronisation of central banks’ response during the onset of the Covid-19 pandemic and the inflationary surge that followed in 2022.
Both central bankers, however, emphasised the global role the US central bank has in setting monetary policy.
While Mr Powell acknowledged the Fed’s domestic mandate, he also touched on the global ramifications their decisions have.
“And that’s all the more so because the dollar is the principle reserve currency which strengthens the transmission of our policy to the global economy,” he said. “So we also know that those effects on gold demand from our policy changes can have an effect on the US as well, it can rebound the US.”
The UAE and Saudi Arabia, the two largest GCC economies, follow the monetary policy decisions of the US central bank because their currencies are pegged to the dollar.
Mr Powell’s remarks came on the sidelines of the IMF and World Bank Spring Meetings, the gathering of the world’s finance ministers and central bankers in Washington.
Among the major themes this year is restoring price stability, as advanced economies prepare to begin easing the restrictive stances they took after a surge in inflation two years ago.
In separate remarks at the Fed building earlier on Tuesday, vice chairman Philip Jefferson also said the US central bank could keep rates elevated.
“Of course, the outlook is still quite uncertain, and if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer,” Mr Jefferson said.
John Williams, the president of the Federal Reserve Bank of New York, said on Monday that he still expects rate cuts will come at a later point this year.
Mr Williams, who also holds a seat on the Federal Open Market Committee, said the US economy will continue to grow despite high interest rates.
It is appropriate to allow restrictive policy further time to work and let the data and the outlook guide us, Powell says