US Markets
Tuesday, July 2nd, 2024 2:11 pm EDT
Key Points
- Federal Reserve Chair Jerome Powell acknowledged significant progress in reducing inflation but emphasized the need for more evidence before considering interest rate cuts.
- Powell highlighted the importance of being cautious, noting that premature rate cuts could reverse the progress made, while delayed action could harm the economic recovery.
- Market expectations for rate cuts have decreased, with projections shifting from six cuts earlier this year to two by the end of the year, though the Federal Open Market Committee has only projected one cut.
Federal Reserve Chair Jerome Powell expressed cautious optimism about the progress made in controlling inflation over the past year but emphasized the need for further improvement before considering interest rate cuts. Speaking at a central banking forum in Sintra, Portugal, Powell noted that recent inflation readings suggest a return to a disinflationary path, but he stressed the importance of being confident that inflation is sustainably moving towards the Fed’s 2% target before easing monetary policy. The forum, presented by the European Central Bank (ECB), also featured ECB President Christine Lagarde and Brazil central bank Governor Roberto Campos Neto, with CNBC’s Sara Eisen moderating the discussion.
Powell’s remarks come at a time when global markets are closely monitoring the actions of the Fed and other central banks as inflation shows signs of easing. Some central banks, including the ECB, have begun to gradually reduce interest rates. In May, the Commerce Department’s personal consumption expenditures price index, the Fed’s main inflation gauge, increased by 2.6% over the previous 12 months. Although this level has been decreasing steadily, policymakers do not expect it to hit the 2% goal until 2026.
While acknowledging the progress in reducing inflation, Powell warned against premature rate cuts that could disrupt the downward trend of price increases, which had reached their highest pace since the early 1980s two years ago. He highlighted the delicate balance the Fed must maintain to avoid either undoing its efforts by moving too soon or undermining the economic recovery and expansion by acting too late.
Powell explained that the risks of moving too late versus too soon have become more balanced this year, given the decline in inflation and the continued strength of the economy and labor market. Previously, the Fed was more concerned about the risk of cutting rates too early, which could have allowed inflation to surge again. At the beginning of the year, market expectations were for at least six Fed rate cuts of a quarter percentage point each. These expectations have since shifted, with the market now anticipating two cuts, one in September and another before the end of the year. However, the rate-setting Federal Open Market Committee (FOMC) in their June meeting projected only one cut.
When asked about the possibility of a rate cut in September, Powell refrained from committing to any specific dates, underscoring the Fed’s cautious approach. The focus remains on ensuring that inflation is on a sustainable path towards the 2% target before any policy loosening occurs. This cautious stance reflects the Fed’s broader strategy to balance the risks of premature action against the potential consequences of delayed responses, aiming to support the ongoing economic recovery while keeping inflation under control.
For the full original article on CNBC, please click here: https://www.cnbc.com/2024/07/02/powell-says-fed-has-made-quite-a-bit-of-progress-on-inflation-but-needs-more-confidence-before-cutting.html
