Jay Powell said the Federal Reserve plans to “maintain policy at the current rate for a longer period of time than expected” in the face of more persistent than expected U.S. inflation.
Speaking at an event in Amsterdam, Netherlands, the Fed chairman said the U.S. economy had “performed very well recently” but that the first months of 2024 had been marked by “lack of progress” when it came to bringing inflation to the lowest level. the central bank’s 2 percent target.
Powell said he expected inflation to “come down on a monthly basis to levels that were more like the lower numbers we had last year,” but “my confidence in that is not as “high as it was.” He added that the Fed must be “patient and let restrictive policy do its job.”
Powell nevertheless reiterated that he did not expect the Fed to raise interest rates further given stubborn inflation.
“For many, many measures, the policy rate is restrictive,” Powell said, adding that “time will tell” whether it was “restrictive enough,” but there was only a “very low probability” that the next measure is an increase in rates. .
Krishna Guha, vice president at U.S. investment bank Evercore-ISI, said Powell’s comments “suggest that the Fed appears to be looking beyond the July meeting and is more geared toward September for a possible first cut.” “.
Markets were unmoved by Powell’s remarks.
U.S. inflation has remained higher than expected for much of this year, denting investors’ hopes that the Fed will cut rates several times before the end of 2024.
In contrast, price pressures in Europe continued to ease, opening the door for the region’s central banks to cut rates ahead of the Fed, upending the traditional pecking order of global monetary policy. The Swiss and Swedish central banks have cut rates and the European Central Bank is expected to do the same at its June 6 meeting.
Dutch central bank boss Klaas Knot, a member of the ECB’s governing council, said at the same event in Amsterdam that if euro zone inflation continued to fall as expected, it would be “appropriate for us to lift gradually the brake” starting by reducing rates next month.
But Knot said the recent “turmoil” in US inflation was “a warning sign” to Europe that it could see a similar increase in price pressures, adding that this was a reason ” not to have preemptive declarations of victory” over inflation. .
He also warned that although wage rises appeared to be gradually slowing, weak productivity growth in Europe would continue to push up labor costs, meaning he would make “no commitment” on further easing at all. beyond June.
Some ECB policymakers have warned that there are limits to how far it can deviate from the Fed, which usually takes the lead on policy changes. However, Knot said it “wouldn’t have much impact” on euro zone inflation if the ECB cut rates before the US central bank.
While a weaker euro would raise import prices and trigger more inflation, higher global borrowing costs – driven by the US Federal Reserve keeping rates high – would help limit price pressures .
U.S. wholesale inflation rose more than expected in April to the largest annualized gain in 12 months, a sign the Fed still has work to do to combat price growth.
The producer price index rose 0.5 percent last month, the Labor Ministry said Tuesday, beating analysts’ expectations for a monthly gain of 0.3 percent.
The annualized rate rose 2.2 percent, from a downwardly revised 1.8 percent in March, to the highest level since April 2023. Powell said the PPI data was “mixed” .
Investors are awaiting the release of the latest U.S. Consumer Price Index data on Wednesday, which is expected to show an annualized increase of 3.6 percent in April, a slight slowdown from the previous month.
Additional reporting by Kate Duguid in New York