Jay Powell says Federal Reserve’s inflation fight is ‘not done’

Federal Reserve chair Jay Powell said: ‘The outlook is still quite uncertain, and we face risks on both sides’. Photo / AP

Jay Powell said the Federal Reserve’s job of bringing down inflation was “not yet done” and the US central bank needed “greater confidence” that price pressures were easing before cutting interest rates, striking a cautious tone on any quick changes to monetary policy.

The Fed’s chairman’s comments at Stanford University’s Business School on Wednesday come after the latest projections from Fed officials in March showed they expected to cut rates by 0.75 of a percentage point this year, down from its 23-year high of 5.25 per cent to 5.5 per cent.

But strong data on the labour market, and signs of stubbornly high inflation, have cast doubt on those forecasts.

Powell said the recent data did not “materially change the overall picture” and noted that “on inflation it is too soon to say whether the recent readings represent more than just a bump”.

However, he noted: “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down towards 2 per cent.”

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Powell’s comments align with the views of other Fed officials who have recently indicated the central bank is in no rush to reduce interest rates, reducing the likelihood of a first move in the next few meetings. But they still leave room for the Fed to begin cutting rates in the second half of 2024.

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“We have time to let the incoming data guide our decisions on policy,” Powell said. “The outlook is still quite uncertain, and we face risks on both sides.”

Powell’s prudence on interest rates came as he stressed the importance of the central bank’s independence to allow it to set policy free from “short-term political matters”, and warned against “mission creep” at the Fed, saying “we are not, nor do we seek to be, climate policymakers”.

His message may be particularly important amid a presidential election race year pitting Joe Biden against Donald Trump. Trump picked Powell to run the Fed during his tenure, but the former President was frequently critical of the central bank chair and repeatedly urged him to lower rates.

Powell also on Wednesday announced the Fed would this year launch a new review of its monetary policy framework, which guides its rates decisions, after the last one was completed in 2020 at the height of the pandemic.

The review, which is expected to last about a year, is roughly in line with the central bank’s plans to update the document every five years. The last one began in 2019 and was completed before the surge in inflation that started in 2021, and was considered more dovish on inflation than the previous framework.

Written by: James Politi in Washington

© Financial Times