Stay informed with free updates
Simply register at US interest rates myFT Digest – delivered straight to your inbox.
US Federal Reserve Chairman Jay Powell said it would likely take “longer than expected” for inflation to return to the central bank’s 2% target and justify a rate cut. interest.
“We told the [Federal Open Market Committee] “We will need greater confidence that inflation is moving sustainably toward 2 percent before it is appropriate to ease policy,” Powell said Tuesday.
“The recent [inflation] The data clearly has not given us greater confidence, but rather indicates that it will likely take longer than expected to achieve that confidence.
The Fed had previously indicated it intended to cut rates this year from a 23-year high of 5.25 percent, but the timing of the first move is now being debated amid signs of continued strength in the US economy and rates above 5.5 percent. -anticipated inflation.
Powell’s remarks come after higher-than-expected consumer price index inflation numbers in March led markets to downgrade expectations that the Fed would cut rates as soon as June. Investors now expect the first measure to come in September, with a growing minority betting there will be one or more cuts this year. Single-cut bets increased after Powell’s remarks.
Although the Fed’s target is tied to another inflation index – that of personal consumption expenditures – Powell also signaled that core PCE, which excludes volatile food and energy costs, had likely changed little in March compared to February, at 2.8 percent.
The Fed chairman added that over the past three and six months, the annualized numbers have been “actually above that level.”
The remarks highlight the growing gap between the Fed’s rate expectations and those of other major central banks.
European Central Bank President Christine Lagarde said on Tuesday that the euro zone’s monetary guardian was still on track to cut rates “in a reasonably short time frame”, provided there was no major shocks from the Middle East or other geopolitical hotspots.
The ECB is expected to cut rates in June.
Lagarde said the ECB was “observing a disinflationary process” in line with her forecasts which made her confident that euro zone inflation would reach its 2 percent target by the middle of next year, even if the path may be “bumpy”.
“If we don’t have a major shock in the way the situation develops, we are heading towards a time where we will have to moderate the restrictive monetary policy that we have, in a reasonably short period of time,” she told CNBC.
Both central banks quickly raised rates in 2022 and 2023 to curb the worst surge in inflation in a generation. However, a stronger US economy means price pressures remain stronger than in Europe.
While inflation has fallen rapidly from multi-decade highs on both sides of the Atlantic, euro zone measures have continued to fall in recent months while U.S. data has edged up.
The US economy is also expected to grow 2.7 percent this year, compared with 0.8 percent for the euro zone.
Powell acknowledged that the U.S. economy’s performance had been “pretty strong,” while saying the country’s hot labor market was “moving toward better balance,” with wage growth now “moderate.”
U.S. stocks rebounded into negative territory as Powell spoke, with the S&P 500 down 0.3 percent shortly after the Fed chair finished speaking.
Treasuries sold off earlier in the trading session, pushing yields higher on the day. Yields on the rate-sensitive two-year Treasury note briefly rose above 5 percent before falling back to 4.97 percent by mid-afternoon.
“Are we going to get to a point where we have to think about hiking? [rates]? I don’t think that’s going to happen in the immediate future,” said Steven Blitz, chief U.S. economist at TS Lombard.
Additional reporting by George Steer in New York
