By Balazs Koranyi and Howard Schneider
SINTRA, Portugal (Reuters) – The U.S. central bank still needs more data before cutting interest rates so that weaker inflation figures can give a true picture of underlying price pressures, Federal Reserve Chairman Jerome Powell said on Tuesday.
May figures showed the Fed’s preferred inflation measure didn’t rise at all that month, while the pace of price increases over the past 12 months fell to 2.6%. That’s still above the central bank’s 2% target, but it’s coming down.
“We just want to understand that the levels that we’re seeing are a true reading of what’s really happening with underlying inflation,” Powell said at a monetary policy conference in Portugal sponsored by the European Central Bank. “We want to have more confidence, and frankly because the U.S. economy is strong … we have the ability to take our time.”
Still, Powell acknowledged that the central bank has entered a sensitive phase in its policy deliberations, with risks to both the Fed’s inflation and employment goals “moving much closer together.”
In particular, a number of closely watched labor market indicators suggest that the U.S. economy may be approaching a point where further gains on inflation will come at the cost of the kind of trade-offs with rising unemployment that the Fed has so far avoided.
“You can’t say for sure,” Powell said, “but it’s clear there are two-sided risks.”
“Given the strength we see in the economy, we can approach it cautiously,” Powell said. However, he also noted that policymakers don’t want to keep policy too tight for too long and “lose the expansion.”
TARIFF REDUCTION TIMETABLE
The Fed has kept its key policy rate steady at 5.25%-5.5% since July last year, but officials are debating when to ease monetary policy as inflation inches back toward the central bank’s 2% target.
According to the Fed’s target price index for personal consumption expenditures, inflation is still more than half a percentage point above that target. In fact, the central bank’s June 12 policy statement described it as “elevated.”
However, the latest data on inflation and overall economic activity suggest price pressures may be easing further, and investors are expecting an initial rate cut of a quarter of a percentage point at the Fed’s Sept. 17-18 meeting.
Whether the Fed ultimately sticks to this timetable or extends it depends on upcoming employment and inflation reports, including the release of the monthly employment report for June on Friday and the release of the Consumer Price Index for June on July 11.
While the timing of the initial rate cut makes little difference to the economic outcomes the Fed seeks, policymakers are aware of the risk of running too tight a monetary policy for too long, endangering the current low unemployment rate if the economy slows too much or too quickly. They are also sensitive to the signal they send by cutting rates.
In particular, they want to make sure that the initial cut in borrowing costs marks the start of a full cycle of monetary easing, with interest rates gradually falling to levels where the Fed believes businesses and households will be neither encouraged nor discouraged from investing and spending.
For many civil servants, this was an argument to be patient and wait longer with the first interest rate cut.
(Reporting by Balazs Koranyi; additional reporting by Howard Schneider; editing by Paul Simao)
