U.S. Federal Reserve Chair Jerome Powell testifies during a Senate Banking, Housing and Urban Affairs Committee hearing, in Washington, on March 7.Tom Brenner/Reuters
Federal Reserve Chair Jerome Powell said on Tuesday the U.S. central bank may need to keep interest rates higher for longer than previously thought, given what he called a “lack of further progress” this year towards the 2 per cent inflation target.
“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,” Powell told a forum in Washington, in what is likely to be his last public appearance before the April 30-May 1 policy meeting.
“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.
U.S. central bankers are universally expected to leave rates unchanged at their upcoming meeting, but investors are keen for any hints on when officials feel a reduction in borrowing costs could come, and Powell’s remarks suggest it won’t be soon.
“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 should the labour market unexpectedly weaken.”
Fed Vice Chair Philip Jefferson omitted any mention of rate cuts in his remarks earlier on Tuesday to a research conference, and said the U.S. central bank was ready to keep its tight monetary policy in place if inflation fails to slow as expected.
Jefferson noted the central bank was facing a strong economy and had seen little recent progress in bringing down inflation, excluding what had been a staple reference in Fed speeches to gaining “confidence” in lower inflation and then cutting rates.
Fed staff estimates that Jefferson released, in fact, indicate March will be another lost month for policy-makers, with the personal consumption expenditures price index expected to have risen at a 2.7 per cent annual rate versus 2.5 per cent in the prior month.
“My baseline outlook continues to be that inflation will decline further, with the policy rate held steady at its current level, and that the labour market will remain strong, with labour demand and supply continuing to rebalance,” Jefferson said.
But “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. I am fully committed to getting inflation back to 2 per cent.”
In his last public remarks, on Feb. 22, Jefferson included what had been a staple of recent Fed communications – that “if the economy evolves broadly as expected, it will likely be appropriate to begin dialling back our policy restraint later this year,” a nod to the possibility of reducing the Fed’s benchmark overnight interest rate from the current 5.25 per cent-5.50 per cent range to account for a slowing pace of price increases.
Analysts and investors have been steadily marking down the likelihood and timing of Fed rate cuts as policy-makers struggle to reconcile a gravity-defying economy with their assessment that monetary policy is “restrictive” and inflation likely on its way down.
Both of those ideas have been called into question by job growth, retail spending, inflation and other data that continue to challenge the Fed’s sense that the economy was gliding towards lower demand, slower growth, and price increases nearing the 2 per cent target.
Just over five weeks ago, Powell told a U.S. Senate panel that the Fed was “not far” from gaining the confidence in falling inflation needed to cut interest rates.
In the following days, futures contracts tied to the Fed’s policy rate reflected an initial quarter-percentage-point rate cut as likely to occur at the central bank’s June 11-12 meeting, with two more reductions in borrowing costs by the end of 2024.
Now the first cut is seen happening in September and the odds of a second cut are dwindling.
“Patience” is likely to remain the watchword.
When inflation was in fast decline last year, Powell was reluctant to declare the fight against it won even as policy-makers laid the groundwork for rate reductions beginning this year.
Officials at the Fed’s March 19-20 meeting said they still expected to cut the policy rate by three-quarters of a percentage point by the end of 2024. Powell at the time said disappointing inflation data in January and February “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes-bumpy road toward 2 per cent.”
Yet the bumps continued through March, enough so that some officials at the last Fed meeting worried monetary policy was not having the sort of impact that would be typically expected from the highest interest rates in a quarter of a century.
Data since then have shown a massive 303,000 jobs were added in March, the pace of consumer price increases accelerated, and even low-income households continued to spend.
The strength of the economy, policy-makers suggest, is one reason they could wait to cut rates and be sure inflation will resume its decline.
“This question of the last mile is a little harder,” with progress slowing as the Fed gets closer to its inflation target, Chicago Fed President Austan Goolsbee said on Friday. “If we see that inflation is on this path back down to 2 per cent, then … do we want to remain as restrictive as we are right now for a prolonged period? If inflation doesn’t come down. That answers it for us.”