Powell Welcomes Recent Data But Fed Needs More Confidence To Cut

(Bloomberg) -- Federal Reserve Chair Jerome Powell said the latest economic data suggest inflation is getting back on a downward path, but added officials would like to see more evidence before lowering interest rates. 

Powell said the Fed has made quite a bit of progress in reducing inflation, adding he'd like to see that progress continue. 

“Because the US economy is strong and the labor market is strong, we have the ability to take our time and get this right,” Powell said during a panel Tuesday at the European Central Bank Forum on Central Banking in Sintra, Portugal. “And that's what we're planning to do.”

The Fed chief, sitting beside ECB President Christine Lagarde and Brazil's central bank chief Roberto Campos Neto, declined to give any specific guidance on the timing for the first rate reduction during the Tuesday panel. 

US central bankers have held their policy rate in a target range of 5.25% to 5.5% — a more than two-decade high — since last July. Officials have said they are waiting for greater confidence that inflation is on a sustained path back to their 2% target.

After a lack of further progress toward the central bank's goal in the first few months of 2024, data out last week painted a more promising picture. The Fed's preferred measure of underlying inflation rose just 0.1% in May, marking the smallest advance in six months. 

The last reading on inflation, and to a lesser extent the one before it, “suggest that we're getting back on a disinflationary path,” Powell said. “What we'd like to see is more data like what we've been seeing recently.”

US Treasury yields veered lower as Powell began speaking, though an unexpected rise in job openings has since helped to pare the earlier decline. Traders in the swaps market continued to price in almost two rate cuts for this year.

The US economy has been remarkably resilient amid high borrowing costs, but there are signs restrictive Fed policy is having an impact.

Labor Market

Home sales have slowed, delinquencies have risen and consumer spending has moderated. Hiring has also cooled, and the unemployment rate — while still historically low at 4% — has edged higher in recent months. 

Powell said there's been a “substantial” move toward better balance in the labor market between the supply of and demand for workers. He continued to describe the job market as strong, but said it is cooling off appropriately so.

Some Fed officials have begun to elevate the labor market as a point of concern. San Francisco Fed President Mary Daly said last week that the job market is nearing an inflection point, where further slowing could lead to higher unemployment.

Other central banks around the world have already begun to lower interest rates, including the ECB and Bank of Canada. Lagarde emphasized in comments Monday, however, that the central bank doesn't yet have sufficient evidence the threat of inflation has passed. 

--With assistance from Will Kubzansky and Sydney Maki.

(Adds market reaction in eighth paragraph.)

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