Federal Reserve Chairman Jerome Powell warned Tuesday that persistently high inflation will likely delay any Fed rate cuts until later this year, opening the door to a period of higher interest rates.
“Recent data have clearly not increased our confidence” that inflation will come fully under control and “instead indicate that it will likely take longer than expected to achieve that confidence,” Powell said during a panel discussion at the Wilson Center .
“If higher inflation continues,” he said, “we can maintain current interest rate levels for as long as necessary.”
The Fed chairman’s comments suggest that without further evidence that inflation is falling, the central bank may make fewer three-quarter-point cuts than officials forecast at their most recent meeting in March.
His comments on Tuesday represented a shift for Powell, who had told a Senate committee on March 7 that the Fed was “not far” away from gaining the confidence needed to cut rates. At a press conference on March 20, Powell appeared to downplay that claim. But his comments on Tuesday went further and reduced the likelihood of rate cuts in the coming months.
“Powell’s comments make it clear that the Fed is now looking past June,” when many economists had previously expected rate cuts to begin, Krishna Guha, an analyst at EvercoreISI, said in a research note.
In recent weeks, government data has shown that inflation remains stubbornly above the Fed’s 2% target and the economy is still growing strongly. Annual inflation rose from 3.2% in February to 3.5% in March. And a closely watched gauge of “core” prices, which exclude volatile food and energy, rose sharply for the third month in a row.
As recently as December, Wall Street traders had priced in as many as six quarter-point rate cuts this year. Now they foresee only two interest rate cuts, the first of which will take place in September.
Powell’s comments followed a speech earlier Tuesday by Fed Vice Chairman Philip Jefferson, who also appeared to raise the prospect that the Fed would not make three cuts to its benchmark interest rate this year. The Fed’s interest rate is at a 23-year high of 5.3% after 11 rate hikes two years ago.
Jefferson said he expected inflation to continue to slow this year, while the Fed’s policy rate “remains stable at current levels.” But he left out a reference to the likelihood of future rate cuts, which he included in a speech in February.
Last month, Jefferson had said that if inflation continues to slow, it will “probably be appropriate” for the Fed to cut rates “sometime this year” – language Powell has also used. Yet neither Powell nor Jefferson made a similar reference Tuesday.
Instead, Powell said only that the Fed could cut rates “should the labor market unexpectedly weaken.”
Fed officials have responded to recent reports that the economy remains strong and inflation is undesirably high by underscoring that they see little urgency to cut their benchmark interest rate in the near term.
On Monday, the government reported that retail sales rose last month, the latest sign that robust job growth and higher stock and home prices are driving solid household spending. Strong consumer spending can keep inflation high because it can lead some companies to charge more, knowing that many people can pay higher prices.