Fed Chair Powell Signals Delay in Interest Rate Cuts Due to Persistent Inflation

Fed Chair Powell warns of delayed rate cuts due to persistent high inflation, indicating potential for longer periods of elevated rates.

During a panel discussion at the Wilson Center, Federal Reserve Chair Jerome Powell cautioned on Tuesday that persistently elevated inflation will likely lead to a delay in any Fed interest rate cuts until later this year. He stated that recent data have not given the Fed greater confidence in bringing inflation fully under control, and instead indicated that it may take longer than expected to achieve that confidence.

Powell's comments suggested that without further evidence of falling inflation, the central bank may carry out fewer than the three quarter-point reductions forecasted by its officials during the most recent meeting in March. These remarks mark a shift for Powell, compared to his earlier statement on March 7, when he had indicated that the Fed was close to gaining the confidence needed to cut rates.

Inflation and Economic Data

Government data in the past several weeks has shown that inflation remains stubbornly above the Fed's 2% target, with year-over-year inflation rising to 3.5% in March from 3.2% in February. Additionally, a closely watched gauge of “core” prices, which exclude volatile food and energy, has risen sharply for a third straight month. This indicates that the economy is still growing robustly.

Market expectations have also adjusted, with Wall Street traders previously pricing in as many as six quarter-point rate cuts for this year. However, they now anticipate only two rate cuts, with the first expected in September.

Fed Official's Speech

Fed Vice Chair Philip Jefferson, in a speech earlier on Tuesday, also hinted at the prospect that the Fed may not carry out three rate cuts this year in its benchmark rate. He expects inflation to continue slowing this year, with the Fed’s key rate held steady at its current level.

Focus on Strong Economy

Fed officials have responded to recent reports indicating that the economy remains strong and inflation is undesirably high by emphasizing that there is little urgency to reduce their benchmark rate anytime soon. This was underscored by the government's report that retail sales jumped last month, reflecting robust job growth and higher stock prices and home values fueling solid household spending. It is noted that vigorous consumer spending can keep inflation elevated due to the potential for businesses to charge more, capitalizing on people's ability to pay higher prices.

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