Apr 16, 2024 - Economy

Powell: Interest rates may stay high as inflation progress stalls


Federal Reserve chair Jerome Powell at an event in Washington on Tuesday. Photo: Samuel Corum/Bloomberg via Getty Images

Federal Reserve chair Jerome Powell on Tuesday suggested that interest rate cuts won't occur as soon as previously thought, citing a "lack of progress" on cooling inflation so far this year.

Why it matters The Fed may keep rates at the current, two-decades high level for longer as it assesses incoming economic data, Powell said in his first public remarks since last week's hotter-than-expected inflation report.

What they're saying: "Given the strength of the labor 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," Powell said during a moderated discussion alongside Canada's top central banker in Washington.

  • That echoed earlier comments on Tuesday from Fed vice chair Philip Jefferson, who said in a speech that it would be appropriate to hold rates steady for longer "if incoming data suggest that inflation is more persistent than I currently expect it to be."

Context: In recent months, Fed officials have said that that they wanted more confidence that inflation was truly falling back to the central bank's 2% target before considering slashing rates.

  • But the March Consumer Price Index (CPI) report is the third-straight report showing that progress on inflation has stalled after a rapid cooldown in 2023.
  • "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence," Powell said.

The big picture: The U.S. economy is strong, with a historic streak of low unemployment and strong consumer spending—allowing the Fed to take more time before cutting rates.

  • "If higher inflation does persist, we can maintain the current level of restriction for as long as needed," Powell said.
  • "At the same time, we have significant space to ease [interest rates] should the labor market unexpectedly weaken," he added.

The bottom line: Financial markets have responded notably to signs that inflation might take longer to vanish, a prospect that could delay the rate cuts signaled by Fed officials as recently as March.

  • Odds that the Fed will keep rates on hold at its June meeting kept rising after Powell's speech on Tuesday.
  • CME's Fedwatch tool, which is based on futures prices, estimated there's an 85% chance that will be the case — compared to 40% odds a week ago.
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