Chair of the Federal Reserve of the United States Jerome Powell announced on Tuesday that the U.S. is once again on a "disinflationary path." That being said, he emphasized that more data is needed before deciding on interest rate cuts to ensure the recent weak inflation figures accurately reflect the state of the economy.
In May, data indicated that the Fed's preferred inflation measure remained steady, with the annual rate of price growth slowing to 2.6%. Although still above the 2% target, this marks a significant decline from the earlier panic levels seen this year.
At a monetary policy conference in Portugal sponsored by the European Central Bank, Powell emphasized the need to confirm that the current inflation levels accurately reflect the underlying inflation trend.
"I think the last reading ... and the one before it to a lesser suggest that we are getting back on the disinflationary path. We want to be more confident that inflation is moving sustainably down toward 2% ... before we start ... loosening policy," Powell noted.
Powell avoided speculating on when rate cuts might start but emphasized that the Fed is in a critical phase where the risks to inflation and employment targets are now more balanced, preventing either from taking precedence.
Key labor market indicators suggest that making further strides in combating inflation may necessitate trade-offs with the unemployment rate—an approach the Fed has managed to avoid thus far.
"You can't know that with precision but it is understood that we have two-sided risks," Powell claimed. The U.S. unemployment rate has remained at 4% or below for over two years, prompting many Fed policymakers to emphasize the need to be cautious when considering rate cuts.
Powell remarked on the economy's robust performance, suggesting that this strength allows for a careful approach to rate adjustments. He additionally mentioned that policymakers aim to avoid maintaining overly tight policies for too long, which could jeopardize the ongoing expansion.
The Fed faces a crucial decision on when and how to signal a policy shift, especially as progress in reducing inflation is expected to be gradual. Powell noted that inflation is unlikely to reach the 2% target before the end of next year or even as late as 2026.
U.S. short-term interest rate futures remained stable on Tuesday, hinting that the Fed might cut rates in September and possibly again in December. The Fed has maintained its benchmark interest rate at 5.25%-5.5% since last July and described inflation as "elevated" in its June 12 statement.
The timing of any rate cuts, whether in September or later, will hinge on forthcoming employment and inflation data, including the monthly jobs report on Friday and the June consumer price index release on July 11. The next Fed meeting is scheduled for July 30-31.
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