Federal Reserve Chair Jerome Powell warned Tuesday that persistently high inflation will likely delay any Fed interest rate cuts until the end of the year, opening the door to a period of higher rates for a longer period.
“Recent data clearly has not given us greater confidence” that inflation is coming fully back under control and “instead indicates that it will probably take longer than expected to reach that confidence,” Powell said during a panel discussion at the Wilson Center.
“If higher inflation persists,” he said, “we can maintain the current level (of interest rates) for as long as necessary.”
The Fed chair’s comments suggest that without further evidence of falling inflation, the central bank may implement cuts lower than the three-quarters of a point its officials predicted at their last meeting in March.
His remarks on Tuesday represented a shift for Powell, who on March 7 told a Senate committee that the Fed was “not far off” from gaining the confidence to cut rates. In a press conference on March 20, Powell appeared to downplay that claim. But his comments on Tuesday went further, diluting the likelihood of any rate cuts in the coming months.
“Powell’s comments make it clear that the Fed is looking beyond June,” when many economists previously expected rate cuts to begin, Krishna Guha, an analyst at EvercoreISI, said in a research note.
In recent weeks, government data has shown that inflation remains stubbornly above the Fed’s 2% target and that the economy is still growing robustly. Year-on-year inflation rose to 3.5% in March, from 3.2% in February. And a closely watched gauge of “core” prices, which exclude volatile food and energy, rose sharply for the third straight month.
Until December, Wall Street traders had priced in rate cuts of up to six quarters of a point this year. They now expect only two rate cuts, the first of which will be in September.
Powell’s comments followed a speech earlier Tuesday by Fed Vice Chair Philip Jefferson, who also appeared to raise the prospect that the Fed will not make three cuts this year to its benchmark rate. The Fed rate is 5.3%, the highest in the last 23 years, after 11 rate increases that began two years ago.
Jefferson said he expects inflation to continue to slow this year with the Fed’s key rate “held stable at the current level.” But he omitted the reference to the likelihood of future rate cuts that he had included in a speech in February.
Last month, Jefferson said that if inflation continues to slow, “it would probably be appropriate” for the Fed to cut rates “at some point this year” – language also used by Powell. Yet neither Powell nor Jefferson made similar references Tuesday.
Powell instead said only that the Fed could reduce rates “if the labor market unexpectedly weakens.”
Fed officials responded to recent reports that the economy remains strong and inflation is undesirably high by stressing that they see no urgency in reducing the key rate any time soon.
On Monday, the government reported that retail sales rose last month, the latest sign that robust job growth and rising stock prices and home values are fueling robust household spending. Vigorous consumer spending can keep inflation high because it can lead some companies to charge more, knowing that many people are able to pay higher prices.