KEYTAKEAWAYS
- US inflation shows signs of cooling after higher readings earlier this year
- Powell stresses more evidence needed before considering rate cuts
CONTENT
Jerome Powell signals cautious optimism as recent data shows inflation slowing, yet emphasizes the need for sustained evidence before considering interest rate reductions. The Fed aims to balance economic stability with inflation control.
Federal Reserve Chair Jerome Powell delivered a cautiously optimistic message on Tuesday regarding the state of US inflation, noting that recent data suggests a return to a disinflationary path. Speaking at the European Central Bank’s monetary policy conference in Sintra, Portugal, Powell acknowledged the improvement in inflation figures while maintaining a prudent stance on potential interest rate cuts.
Powell highlighted that after some persistently high inflation reports at the start of 2024, the data for April and May indicate a positive trend. However, he emphasized that Fed officials still want to see annual price growth slow further towards their 2% target before confidently declaring victory over high inflation.
The Fed Chair’s comments come on the heels of the latest government report, which showed consumer prices, according to the Fed’s preferred measure, remained unchanged from April to May – the mildest such reading in over four years. Year-over-year inflation dropped to 2.6% in May from 2.7% in April, with core inflation (excluding volatile food and energy costs) also showing improvement.
Despite these encouraging signs, Powell stressed the importance of balancing monetary policy during this critical period. He expressed concern about the risks of cutting rates too soon, which could lead to a resurgence of inflation, or waiting too long, potentially weakening the economy to the point of recession.
Regarding the US economy and job market, Powell maintained a positive outlook, describing them as fundamentally healthy. He noted that the job market is “cooling off appropriately” without presenting significant inflationary pressures through rapid wage gains.
While investors are betting on a high likelihood of a rate cut at the Fed’s September meeting, Powell declined to signal any specific timeframe for such action. He reiterated the Fed’s commitment to achieving sustainable price stability, echoing recent statements from other Fed officials.
As the Fed navigates this complex economic landscape, Powell’s remarks underscore the central bank’s cautious approach to monetary policy. The coming months will be crucial in determining whether the current disinflationary trend is sustainable and sufficient to warrant a shift in the Fed’s interest rate strategy.
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