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U.S. Federal Reserve Chair Jay Powell said it would likely take “longer than expected” for inflation to return to the central bank’s 2% target and justify interest rate cuts.
“We told the [Federal Open Market Committee] that we will need greater confidence that inflation is moving sustainably towards 2% before it is appropriate to ease monetary policy,” Powell said on Tuesday.
“The recent [inflation] the data clearly has not given us greater confidence, and instead indicates that it is likely to take longer than expected to achieve that confidence.”
The Fed had previously indicated it planned to cut rates to 5.25-5.5% from a 23-year high this year, but the timing of the first move is now debated amid signs of continuing strength in the U.S. economy, and rates higher than expected inflation.
Powell’s remarks came after higher-than-expected consumer price index inflation data in March led markets to reject expectations that the Fed would cut rates as early as June. Investors now expect the first move to come in September, with a growing minority betting there will be one or fewer cuts this year. Bets on a single cut increased after Powell’s remarks.
Although the Fed’s target is tied to another inflation index – one relating to personal consumption expenditures – Powell also signaled that core PCE, which excludes volatile food and energy costs, likely remained little changed in March compared to February, at 2.8%.
The Fed chairman added that over the past three and six months, annualized values have been “effectively above that level.”
The remarks highlight the widening gap between rate expectations for the Fed and other major central banks.
European Central Bank President Christine Lagarde said Tuesday that the eurozone’s monetary watchdog is still on track to cut rates “reasonably quickly,” provided there are no major shocks from the Middle East or other hot spots geopolitical.
The ECB is expected to cut rates in June.
Lagarde said the ECB was “observing a disinflationary process” in line with her forecasts which made her confident that eurozone inflation will reach its 2% target by the middle of next year, although the path will likely be “bumpy”.
“If we don’t have a major shock in developments, we are heading towards a time where we will have to moderate the restrictive monetary policy that we have, in a reasonably short time,” he told CNBC.
Both central banks raised rates rapidly throughout 2022 and 2023 to curb the worst wave of inflation in a generation. However, a stronger US economy meant that pricing pressures remained 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 while US data has risen.
The U.S. economy is also expected to expand by 2.7% this year, compared to 0.8% in the euro area.
Powell acknowledged that the U.S. economy’s performance has been “fairly strong,” though he said the country’s hot job market is “moving toward better balance,” with wage growth now “moderate.”
US stocks rebounded into negative territory following Powell’s speech, with the S&P 500 falling 0.3% shortly after the Fed chair finished speaking.
Treasury bonds sold off early in the trading session, pushing yields higher on the day. Yields on rate-sensitive two-year Treasury notes briefly rose above 5% before falling to 4.97% in mid-afternoon trading.
“We’ll get to a point where we’ll have to think about hiking [rates]? I don’t think that will happen in the immediate future,” said Steven Blitz, chief U.S. economist at TS Lombard.
Additional reporting by George Steer in New York