Federal Reserve Chair Jerome Powell on Tuesday said that the US central bank still needs more data before easing the interest rates. In May, the Federal Reserve’s favoured gauge of inflation remained unchanged, indicating no increase for that month. The 12-month rate of price growth decreased to 2.6%, although it still exceeds the central bank’s target of 2% but is showing a downward trend.
Powell said the central bank needs more data to be sure recent weaker inflation readings give a true picture of what is happening to underlying price pressures.
“I think the last [inflation] reading and the one before it do suggest that we are getting back on a disinflationary path,” Powell said on Tuesday. “We want to be more confident that inflation is moving sustainably down before we start the process of loosening policy.”
On Friday, US government data indicated that the personal consumption expenditures price index (PCEPI), which is the Federal Reserve’s favoured gauge of inflation, remained virtually steady in May. This marked a resumption of a monthly inflation rate previously observed in the autumn of 2023, offering a favorable development for individuals advocating for potential interest rate reductions in 2024.
More monthly readings like those are needed to convince policymakers that the slowing inflation is real and not another headfake, Powell said at a monetary policy conference in Portugal sponsored by the European Central Bank.
The Fed has kept its benchmark policy interest rate steady in the 5.25%-5.5% range since last July, but officials are debating when to ease monetary policy as inflation edges back to the central bank’s 2% target.
Inflation is still more than half a percentage point above that target, according to the Fed’s preferred personal consumption expenditures price index, and was described as “elevated” in the central bank’s June 12 policy statement.
The most recent data on inflation and overall economic activity, however, suggest that price pressures may be easing further, and investors anticipate an initial quarter-percentage-point rate reduction at the Fed’s September 17-18 meeting.
Whether the Fed ends up on that timetable or a more delayed one will hinge on coming employment and inflation reports, including the release on Friday of the monthly employment report for June and the July 11 release of the consumer price index for June.
Powell refrained from providing an in-depth analysis of fiscal policy during his recent statement. However, he expressed concern that the federal government cannot sustain such significant budget deficits indefinitely. Currently, the ratio of U.S. public debt to gross domestic product exceeds 120%, and projections indicate that the federal deficit is expected to reach approximately 6% of GDP by the year 2024.
(With agency inputs)
