Jerome Powell, the current chairman of the Federal Reserve, expressed satisfaction with the progress made on inflation. He was speaking in Portugal at an event organised by the ECB.
The theme of the event was to highlight global perspectives on inflation and central bank policies. Apart from Powell, European Central Bank President Christine Lagarde and Brazil central bank Governor Roberto Campos Neto were also speaking at the event.
The US Commerce Department released the PCE numbers yesterday. The inflation figure stands at 2.6%, still well above the Fed’s goal of 2%. Policymakers do not expect inflation to come down to 2% until 2026.
This leaves the FED with a dilemma. If they start cutting rates too soon, they could potentially undo the work they have done untul now. If they wait to long, they could put unnecessary burden on the economy and hamper growth.
This is what Powell had to say about this:
We’re well aware that if we go too soon, that we can undo the good work we’ve done. If we do it too late, we could unnecessarily undermine the recovery and the expansion.
The Federal Reserve has a clear stance as of now. It wants to see more evidence before it can confidently start cutting rates. That means fewer rate cuts in the future. Powell said,
We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing or loosening policy
Earlier in the year, market was expecting up to 6 rate cuts in the year. But as the FED’s stance becomes more and more clear, market adjusts to the new reality. For now, experts only expect two more rate cuts later in the year.
While some analysts think the two rate cuts could come in September and December, Powell is quite clear on not giving an specific dates:
I’m not going to be landing on any specific dates here today.
Balancing inflation and unemployment
Inflation isn’t the only problem FED has to tackle. Data suggests that the US economy may soon reach a point where it may not be possible to reduce inflation without adding to unemployment.
At the end of the day, the FED is likely to err on the side of caution and not go aggressive with the rate cuts. The benchmark policy rate is being maintained in the 5.25% – 5.5% range since July last year. It might not go below the 5% mark till the end of the year.
The FED has so far shown a strong will in not caving to market expectations and that is likely to continue, considering the fact that inflation is still half a percentage point above the desired target.
As always, the world continues to monitor Powell’s words and the FED’s decisions. For now, all they’re getting from Powell is ‘we need more data to confirm a sustainable downtrend in inflation’.
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