Powell: More Evidence Needed Before Fed Cuts Interest Rates

Federal Reserve Chair Jerome Powell said the latest economic data suggest inflation is getting back on a downward path but added that officials would like to see more evidence before lowering interest rates. Speaking at the European Central Bank Forum on Central Banking in Sintra, Portugal, Powell emphasized the progress made in reducing inflation but stressed the importance of continuing this trend. “The US economy is strong and the labor market is strong. We have the ability to take our time and get this right,” Powell stated during a panel with ECB President Christine Lagarde and Brazil’s central bank chief Roberto Campos Neto. He refrained from giving specific guidance on the timing for the first rate reduction. The Fed has maintained its policy rate in the range of 5.25% to 5.5%, the highest in over two decades, since last July. Officials are awaiting more conclusive evidence that inflation is on a sustained path back to their 2% target. Market Overview:

• Fed remains cautious despite recent positive inflation data
• US Treasury yields dipped during Powell’s speech
• Swaps market pricing in nearly two rate cuts this year

Key Points:

• Latest data shows Fed’s preferred inflation measure rose only 0.1% in May
• Labor market showing signs of cooling but remains strong
• Powell emphasizes need for sustained evidence before rate cuts

Looking Ahead:

• Fed officials closely monitoring upcoming economic data
• Global central banks’ policies impacting Fed’s considerations
• Potential for rate cuts contingent on continued disinflation

Recent data indicated that the Fed’s preferred measure of underlying inflation rose just 0.1% in May, marking the smallest advance in six months. Powell noted that this, along with the previous month’s data, suggests a return to a disinflationary path. However, he emphasized the need for more consistent data to confirm this trend. US Treasury yields initially fell as Powell began speaking, though an unexpected rise in job openings mitigated the decline. Traders are currently pricing in nearly two rate cuts for this year. The US economy has shown resilience despite high borrowing costs, but restrictive Fed policy is making its mark. Home sales have slowed, delinquencies have risen, and consumer spending has moderated. While the labor market remains strong, it is showing signs of cooling appropriately. Powell highlighted the substantial move towards better balance in the labor market, with the unemployment rate edging higher to 4%. Other central banks, including the ECB and Bank of Canada, have already started lowering interest rates, but Lagarde reiterated the need for more evidence before declaring the threat of inflation over.