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The US Federal Reserve has become more confident that inflation is moving back down to its 2 per cent target, the central bank’s chair said on Monday, in the latest sign that it is preparing to cut interest rates.
Speaking at the Economic Club of Washington, Jay Powell appeared optimistic about a drop in inflation signalled in last week’s consumer price index report, which showed price pressures were easing in the US.
“Our test has been for quite some time that we want to have greater confidence that inflation was moving sustainably down towards our 2 per cent target, and what increases confidence in that is more good inflation data,” said Powell. “And lately, we have been getting some of that.”
The Fed chair also referred to the last three monthly inflation reports, which he said reflected “a pretty good pace” of price growth. They were preceded by an unexpected resurgence of inflation in the first quarter of the year which pushed back the timing of when the central bank would begin cutting its benchmark policy rate from its current level of 5.25-5.5 per cent.
Markets do not expect the Fed to reduce rates at its upcoming meeting at the end of the month but Powell’s comments will reinforce expectations that it is preparing to lower borrowing costs when it meets in September.
Powell declined to comment about the timing of the rate move, but has previously said policy decisions would be made “meeting by meeting”.
However, he was among the Fed officials who last week began laying the groundwork for a rate cut, citing better than expected economic data and a greater awareness of the potential effects to the labour market if borrowing costs were kept too high for too long.
The US unemployment rate, while still historically low, has ticked up in recent months and hovers at 4.1 per cent. But wage growth has slowed as monthly job gains have moderated, leading officials to frame the risks to the outlook as “two-sided”.
However, Powell on Monday said that a so-called hard landing, in which the unemployment rate jumps as inflation returns to target, is not the “most likely or a likely scenario”.
Asked about the trajectory for rates over the longer term, Powell said that the “neutral” rate — a level that neither stimulates nor suppresses growth — had probably risen, suggesting that rates would settle at a higher level than before the pandemic.
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