Powell calls ‘real progress’ as central bankers assess inflation-fighting efforts
Federal Reserve Chairman Jerome H. Powell said inflation in the United States is falling again and that the Fed has made “a lot of progress” in slowing price increases so that they are moving toward its goal.
Inflation “is now showing signs of resuming its disinflationary trend,” Mr. Powell said Tuesday at the European Central Bank’s annual conference in Sintra, Portugal. It was an upbeat message after the Fed’s fight against inflation put a damper on the economy earlier this year.
Fed officials have been waiting for further progress on inflation before cutting interest rates, which are currently at their highest level in decades. by 5.3 percentMr Powell declined to say exactly when authorities might start cutting borrowing costs, but he did indicate they could cut rates if inflation rates remained at current levels or the labour market weakened.
“What we would like to see is more data like we’ve seen recently,” Powell said, later adding: “We have the opportunity to take our time and get this right.”
Joining Mr Powell on the panel, Christine Lagarde, the president of the European Central Bank, said European policymakers were also not rushing to cut interest rates again, after an initial cut in June. ECB officials would continually reassess whether economic data gave them enough confidence to cut rates further, she added.
Inflation “is moving in the right direction,” she said. “But we still believe it’s likely to be a bumpy road through to the end of 2024.”
With inflation in both the United States and Europe slowing over the past year and a half, central bankers have been trying to gauge how much effort they should put into reducing price pressures and bringing inflation back toward their 2 percent targets. The Fed’s preferred inflation measure came in at 2.6 percent in May. In the euro zone, annual inflation slowed to 2.5 percent in June, data released Tuesday showed.
The Fed has left interest rates unchanged since July 2023. Officials initially expected to cut rates multiple times this year, but instead have kept borrowing costs flat so far, waiting for evidence that inflation will continue to fall. At their June meeting, most Fed officials predicted one or two interest rate cuts before the end of the year, and investors now expect those cuts could start in september.
Asked if a rate cut would happen, Mr. Powell said he would not “set a specific date today,” but he also noted that there were risks to acting too early and too late. Acting too early could keep inflation higher. Acting too late could squeeze the economy too hard and risk a recession.
“We have two-sided risks now more than we did a year ago,” Powell said. “That’s a big change.”
Mr. Powell noted that some of the persistent inflation in the U.S. services sector was the lagged result of earlier trends, such as a rise in market-based rents that had been slow to feed into official data. He acknowledged that Fed officials did not expect to bring inflation fully back to their target this year.
“The most important thing is that we make real progress,” he said.
While inflation in the United States and Europe has followed relatively similar paths over the past three years, their economies have diverged significantly. The United States has grown surprisingly strongly, but the eurozone has only just emerged from five quarters of economic stagnation.
The ECB cut interest rates last month for the first time since 2019 as policymakers forecast inflation would return to 2 percent by the end of next year. But European officials have declined to specify how many more rate cuts could come, citing fears of persistent inflation in the services sector. Last month, eurozone services inflation remained at 4.1 percent.
“Services are the difficult one,” Ms Lagarde said. Policymakers are trying to understand whether inflation in services is caused by permanent changes in the sector or by prices catching up with rising inflation in other areas, such as energy.
The ECB is not expected to cut rates at its July meeting, but some investors are betting that rates could be cut in September, when the central bank releases new economic forecasts. Traders are betting on one or two more rate cuts this year.
Mr Powell and Ms Lagarde were speaking to current and former policymakers from around the world, as well as academics and banking economists, who had gathered to discuss “monetary policy in an era of transformation.”
Earlier Tuesday, attendees debated whether the recent rise in inflation in the United States and Europe was driven by supply shocks, such as shipping disruptions during the coronavirus pandemic and Russia’s invasion of Ukraine, or by a surge in demand from expansionary fiscal policy and pent-up demand after lockdowns. They also worried about how geopolitical risks, including wars and trade tariffs, have often led to higher inflation.
