Powell: ‘Quite a bit of progress’ on inflation, but not enough to cut rates

Federal Reserve Chair Jerome Powell said Tuesday the central bank needs to see better inflation readings before cutting interest rates and stimulating the economy despite “quite a bit of progress” toward price stability.

“We want to be more confident that inflation is moving sustainably down toward 2 percent before we start the process of reducing how tight our policy is, of loosening policy,” he said Tuesday at an event in Portugal.

The Fed has held interest rates steady at a range of 5.25 to 5.5 percent for nearly a year as inflation has remained elevated above the Fed’s target level of 2 percent.

After falling precipitously from a 9-percent annual increase two years ago to 3 percent a year ago, the consumer price index has hovered between 3 and 4 percent for the last year.

Recent inflation readings have been more encouraging for the central bank as the personal consumption expenditures (PCE) price index fell from 2.8 percent in the fourth quarter of last year to 2.6 percent in the first quarter.

The PCE was flat between April and May and dropped to an annual increase of 2.6 percent in May from 2.7 percent in April.

Despite requiring better inflation readings, Powell acknowledged the progress the economy has made regarding inflation.

“We’ve made quite a bit of progress in bringing inflation back down toward our target while the labor market has remained strong and growth has continued. We want that process to continue,” he said, adding that the economy “now shows signs of resuming its disinflationary trend.”

Powell also noted how well the U.S. economy performed last year, even in the face of widespread predictions of recession. He called U.S. economic performance in 2023 “extraordinary” from the perspective of growth and employment, saying things worked out in a “remarkable way.”

Markets expect the Fed to hold rates steady at its next rate-setting meeting in July, with the CME FedWatch prediction algorithm putting the chances of a hold at 91.2 percent.

For September, the outlook is more mixed, with the chances of holding at the current range now at 31 percent and the chances of a quarter-point cut at 63.2 percent.