Fed Chair Powell discusses inflation challenges

Jerome Powell highlights slower disinflation, signaling a longer period of current rate policies

Fed Chair Powell discusses inflation challenges

Federal Reserve Chair Jerome Powell has addressed the annual general meeting of the Foreign Bankers’ Association in Amsterdam on Tuesday.

He discussed the slower-than-expected decline in inflation and its implications for monetary policy, as reported by CNBC.

Powell noted that the pace of disinflation observed in 2023 has significantly slowed this year, prompting a reassessment of the Federal Reserve's policy direction.

Powell expressed that the inflation data coming in were unexpectedly high, stating, “We did not expect this to be a smooth road. But these [inflation readings] were higher than I think anybody expected. What that has told us is that we’ll need to be patient and let restrictive policy do its work.”

He acknowledged the ongoing challenge with inflation not decreasing as anticipated so far this year.

Powell emphasized the need for maintaining the current policy rate for a longer period than previously considered, remarking, “I do think it’s really a question of keeping policy at the current rate for longer than had been thought.”

Despite this outlook, Powell reiterated that he does not foresee the Federal Reserve raising interest rates in the near future. The Fed has maintained its key overnight borrowing rate within a target range of 5.25 percent-5.5 percent since July, marking the highest level in approximately 23 years.

Powell added, “I don’t think that it’s likely, based on the data that we have, that the next move that we make would be a rate hike. I think it’s more likely that we’ll be at a place where we hold the policy rate where it is.”

As Powell delivered these remarks, financial markets showed a mixed reaction with major averages hovering around breakeven and Treasury yields edging lower. Futures traders even slightly increased the market-implied probability of the Fed’s first rate cut happening in September.

Reflecting on the most recent Federal Open Market Committee meeting on May 1, where the decision was unanimously made to maintain interest rates, Powell reiterated concerns overachieving the Fed’s 2 percent inflation target.

This followed a series of 11 interest rate hikes aimed at curbing inflation.

Adding to these concerns, the Labor Department released new inflation data on Tuesday, revealing a higher-than-expected rise in the producer price index for April, driven primarily by a surge in services prices.

Although the report presented mixed signals, with some components indicating easing price pressures, Powell described the overall situation as “mixed” and called for more data to assess the persistence of inflation, stating, “Is inflation going to be more persistent going forward? ... I don’t think we know that yet. I think we need more than a quarter’s worth of data to really make a judgement on that.”