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US Federal Reserve chair Jay Powell has said it is likely to take “longer than expected” for inflation to return to the central bank’s 2 per cent target and justify cuts to interest rates.
“We’ve said at the FOMC [Federal Open Market Committee] that we’ll need greater confidence that inflation is moving sustainably toward 2 per cent before it would be appropriate to ease policy,” Powell said on Tuesday.
“The recent [inflation] data have clearly not given us greater confidence, and instead indicate that it’s likely to take longer than expected to achieve that confidence.”
The Fed previously indicated that it intended to cut rates from a 23-year high of 5.25-5.5 per cent this year, but the timing of the first move is now being debated amid signs of persistent strength in the US economy, and higher-than-anticipated inflation.
Powell’s remarks came after higher-than-expected figures for consumer price index inflation in March led markets to row back expectations that the Fed would cut rates as soon as June. Investors now forecast the first move will come in September, with a growing minority betting that there will be no cuts this year.
While the Fed’s target is linked to another inflation index — for personal consumption expenditures — Powell also flagged that core PCE, which strips out volatile food and energy costs, was likely little changed in March over February, at 2.8 per cent.
“In the three and six months, measures of inflation are actually above that level,” the Fed chair said.
The remarks highlight the widening gap between rate expectations for the Fed and other big central banks.
European Central Bank president Christine Lagarde said earlier on Tuesday that the eurozone’s monetary guardian was still on track to cut rates “in reasonably short order”, providing there are no big shocks from the Middle East or other geopolitical hotspots.
Lagarde said the ECB was “observing a disinflationary process” in line with its forecasts that made it confident eurozone inflation would reach its 2 per cent target by the middle of next year, even if the path there is likely to be “bumpy”.
“If we don’t have a major shock in developments, we are heading towards a moment where we have to moderate the restrictive monetary policy that we have, in reasonably short order,” she told CNBC.
Both central banks raised rates rapidly during 2022 and 2023 to curb the worst bout of inflation in a generation. However, a stronger US economy has meant price pressures remain stronger than those in Europe.