By Balazs Koranyi and Howard Schneider
SINTRA, Portugal (Reuters) – The U.S. central bank still needs more data before cutting interest rates to ensure that recent weaker inflation figures give a true picture of what is happening to underlying price pressures, Federal Reserve Chairman Jerome Powell said on Tuesday.
Data for May showed that the Fed’s preferred measure of inflation did not rise at all that month, while the 12-month rate of price increases eased to 2.6%, still above the central bank’s 2% target but down.
“We just want to understand that the levels we’re seeing are a true indication of what’s really happening with core inflation,” Powell said at a monetary policy conference hosted by the European Central Bank in Portugal. “We want to be more confident and, frankly, because the U.S. economy is strong … we have the opportunity to take our time.”
However, Powell acknowledged that the central bank has entered a sensitive phase of its policy deliberations, where risks to the Fed’s inflation and employment targets “have come much closer to balance.”
In particular, some closely watched measures of the labor market suggest that the U.S. economy may be approaching a point where further progress on inflation will involve the kind of trade-off with rising unemployment that the Fed has so far avoided.
“We can’t know with precision,” Powell said, “but it is understood that we are running double-sided risks.”
“Given the strength of the economy, we can approach this cautiously,” Powell said, while noting that policymakers do not want to keep policy too tight for too long and “lose the expansion.”
RATE REDUCTION SCHEDULE
The Fed has kept its benchmark interest rate in the 5.25% to 5.5% range since last July, but officials are debating when to ease monetary policy as inflation returns to the central bank’s 2% target.
Inflation remains more than half a percentage point above that target, according to the Fed’s preferred personal consumption expenditures price index, and was described as “elevated” in the central bank’s June 12 policy statement.
The latest data on inflation and overall economic activity, however, suggest that price pressures could ease further, and investors are anticipating an initial rate cut of a quarter percentage point at the Fed’s September 17-18 meeting.
Whether the Fed sticks to that schedule or delays it will depend on upcoming employment and inflation reports, including Friday’s June jobs report and the July 11 release of the June consumer price index.
While the timing of an initial rate cut matters little relative to the broader economic outcomes the Fed seeks, policymakers are mindful of the risks of keeping tight monetary policy in place for too long—and of jeopardizing the current low unemployment rate if the economy slows too much or too quickly—and are also sensitive to the signal they will send by cutting rates.
In particular, they want to ensure that the first reduction in borrowing costs becomes the start of a full cycle of monetary easing that gradually brings rates back to a level where the Fed believes neither encourages nor discourages businesses and households to invest and spend.
For many officials, this is an argument in favor of patience and waiting longer before making the first rate cut.
(Reporting by Balazs Koranyi; additional reporting by Howard Schneider; editing by Paul Simao)
