Powell says Fed waiting on rate cuts for more evidence inflation is easing

Despite last week’s encouraging inflation report, Federal Reserve Chair Jerome Powell gave no signal Tuesday that officials are poised to cut interest rates as early as this month, saying they “can afford to take our time” as they seek more evidence that a historic bout of price increases is easing.

He would not comment on whether the central bank could lower its key interest rate in September, as many economists expect.

Noting the Fed’s preferred inflation measure has tumbled to 2.6% from 5.6% in mid-2022, Powell said “that’s really, really significant progress.”

But at a forum hosted by the European Central Bank in Portugal, he added, “We want to have more confidence inflation is moving down” to the Fed’s 2% goal before trimming rates. “What we’d like to see is more data like we’ve been seeing.”

That largely echoes remarks Powell made following a mid-June meeting and a report earlier that day that showed inflation notably softening in May, based on the consumer price index.

Is inflation actually going down?

Another inflation measure released Friday that the Fed watches more closely revealed even more of a pullback. It highlighted overall prices were flat in May and a core reading that excludes volatile food and energy items ticked up 0.1%. That nudged down the annual increase in core prices from 2.8% to 2.6%, lowest since March 2021.

But Powell said, “That’s one month of 2.6%.”

How is the job market doing right now?

Meanwhile, he said, the economy has been solid, though growth of the nation’s gross domestic product slowed from 2.5% last year to 1.4% annualized in the first quarter, according to one measure. And employers added a robust 272,000 jobs in May and an average 248,000 a month so far this year.

“Because the U.S. economy is strong… we can afford to take our time and get this right,” he said.

Why would the Fed decrease interest rates?

The Fed raises rates to increase borrowing costs for mortgages, credit cards and other types of loans, curtailing economic activity and inflation. It reduces rates to push down those costs and spark the economy or help dig it out of recession.

Powell noted, however, that risks “are two-sided.” The Fed could cut rates too soon, reigniting inflation, or wait too long, tipping the economy into recession, he said.

Many forecasters have pointed to nascent signs the economy is weakening. Retail sales slowed in May. And despite strong payroll gains, a separate Labor Department survey of households showed the unemployment rate rose from 3.9% to 4% in May, highest since January 2022. Hiring has dipped below prepandemic levels, and low- and middle-income Americans are struggling with near-record credit card debt, rising delinquencies and the depletion of their COVID-era savings.

Yet Powell said Tuesday a 4% unemployment rate “is still a really low level.”

From March 2022 to July 2023, the Fed hiked its key interest rate from near zero to a range of 5.25% to 5% – a 23-year high – in an effort to tame a pandemic-induced inflation spike. Inflation eased notably the second half of last year but picked up in the first quarter, making Fed officials wary of chopping rates too soon.

By September, many economists believe, the Fed will have seen several months of tamer inflation, giving officials the confidence to begin reducing rates.