Federal Reserve Chairman Jerome H. Powell reiterated Tuesday that policymakers are prepared to keep interest rates steady at high levels as they await evidence that inflation is slowing further.
Federal Reserve officials entered 2024 expecting to cut interest rates, then sharply raised borrowing costs to 5.3% between 2022 and the middle of last year, the highest in more than two decades. But stubbornly fast inflation in recent months has upended those plans.
Central bankers have made it clear that a rate cut this year is still possible, but they have also said they plan to keep rates on hold for some time to see if inflation can truly be brought under control.
Speaking at a panel discussion in Amsterdam, Powell said officials were surprised by the latest inflation numbers. The Consumer Price Index, a measure of inflation due to be released on Wednesday, showed a sharp decline in 2023 but has not exceeded 3% this year. The Federal Reserve's preferred measure, the Personal Consumption Expenditures Index, is slightly cooler but also well above the Federal Reserve's 2% inflation target.
“We didn’t expect this to be a smooth road, but it was higher than anyone expected,” Powell said Tuesday of the latest inflation numbers. “What it tells us is that we need to be patient and let the restrictive policies work.”
Powell said he expects continued growth and a strong labor market in the coming months and that inflation will begin to slow again.
But he said: “Having seen the numbers from the first three months of the year, my confidence in him is not as high as it used to be.”
The Fed Chairman made it clear that further rate hikes are not expected, although not impossible. He said it was very unlikely that the Fed would need to raise interest rates again, but he did not think that was the most likely outcome.
“The real problem is maintaining policy at current rates for a longer period of time than we thought,” Powell said. “The question is, is this restrictive enough? And I think that will be a question that only time will tell.”
The Federal Reserve chairman recently said he expects rents, a major driver of inflation, to eventually curb price increases. But he admitted the cooldown took longer than expected.
He also noted that the policy may take longer to work this time around, as homeowners and businesses were locked into very low interest rates when borrowing costs were at their lowest in the 2010s and 2020.
Chairman Powell said, “This American economy is different.”
Nonetheless, he has repeatedly said he thinks interest rates are high enough to gradually weigh on growth and eventually push inflation down the rest of the way.
“Initially we were very concerned that unless there was a significant decline in employment and a weakening in economic activity, it could be very difficult to curb the very high inflation that we have seen. That has not happened, and that is a great result.” Mr. Powell said.
Even though inflation has fallen significantly from its 2022 high, Americans are dissatisfied with their economic situation, which is evident in low levels of consumer confidence. Mr Powell said the complaints were due to continued high price levels.
Since inflation measures changes in prices, slow inflation only means that prices are no longer rising as quickly, and does not necessarily mean that prices will fall after sharp increases in 2021 and 2022.
“When you tell people, ‘Inflation is falling,’ they think, ‘I don’t understand,’” Powell said. “People at the lower end of the income spectrum have been particularly hard hit by inflation from the beginning, which is why we are committed to restoring and maintaining price stability.”