Powell says US inflation ‘taking longer than expected’ to hit target

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US Federal Reserve chair Jay Powell has said it is likely to take “longer than expected” for inflation to return to the central bank’s 2 per cent target and justify cuts to interest rates.

“We’ve said at the [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably toward 2 per cent before it would be appropriate to ease policy,” Powell said on Tuesday.

“The recent [inflation] data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.”

The Fed previously indicated that it intended to cut rates from a 23-year high of 5.25-5.5 per cent this year, but the timing of the first move is now being debated amid signs of persistent strength in the US economy, and higher-than-anticipated inflation.

Powell’s remarks came after higher-than-expected figures for consumer price index inflation in March led markets to row back expectations that the Fed would cut rates as soon as June. Investors now forecast the first move will come in September, with a growing minority betting that there will be one or fewer cuts this year. Bets of just one cut rose after Powell’s remarks.

While the Fed’s target is linked to another inflation index — for personal consumption expenditures — Powell also flagged that core PCE, which strips out volatile food and energy costs, was likely little changed in March over February, at 2.8 per cent.

The Fed chair added that over the past three and six months, annualised readings were “actually above that level”.

The remarks highlight the widening gap between rate expectations for the Fed and other big central banks.

European Central Bank president Christine Lagarde said earlier on Tuesday that the eurozone’s monetary guardian was still on track to cut rates “in reasonably short order”, providing there are no big shocks from the Middle East or other geopolitical hotspots.

The ECB is widely expected to cut rates in June.

Lagarde said the ECB was “observing a disinflationary process” in line with its forecasts that made it confident eurozone inflation would reach its 2 per cent target by the middle of next year, even if the path there is likely to be “bumpy”.

“If we don’t have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have, in reasonably short order,” she told CNBC. 

Both central banks raised rates rapidly during 2022 and 2023 to curb the worst bout of inflation in a generation. However, a stronger US economy has meant price pressures remain stronger than those in Europe.

While inflation has fallen rapidly from multi-decade highs on both sides of the Atlantic, eurozone measures have continued to fall in recent months as US data has edged up.

The US economy is also set to expand by 2.7 per cent this year, compared with 0.8 per cent for the euro area.

Powell acknowledged that the performance of the US economy had been “quite strong”, though he claimed the country’s hot labour market was “moving into better balance”, with wage growth now “moderating”.

US stocks bounced around in negative territory as Powell spoke, with the S&P 500 down 0.3 per cent shortly after the Fed chair finished speaking. 

Treasuries sold off earlier in the trading session, pushing yields higher on the day. Yields on rate-sensitive two-year Treasuries briefly rose above 5 per cent before falling back to 4.97 per cent in mid-afternoon trading. 

“Are we going to get to a point where we have to think about hiking [rates]? I don’t see it happening in the immediate future,” said Steven Blitz, chief US economist at TS Lombard.

Additional reporting by George Steer in New York

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