Federal Reserve Chair Jerome Powell stated that policymakers have made significant progress in combating inflation but emphasized the need for further evidence before considering a reduction in interest rates. Powell, speaking at a central bank forum in Sintra, Portugal, highlighted that recent inflation reports from April and May indicate a decrease in price pressures within the economy. The Fed aims for this downward trend in inflation to continue.
At their latest meeting in May, officials decided to maintain interest rates at a range of 5.25% to 5.5%, the highest level since 2001. While leaving the possibility of rate cuts later in the year open, policymakers stressed the importance of gaining more confidence in the decline of inflation before adjusting policy.
Recent data shows signs of easing inflation, with the May personal consumption index revealing a slight cooling to 2.6% from a peak of 7.1%. Core prices, excluding volatile components like food and energy, also rose by 2.6%, the slowest annual rate since March 2021.
Powell acknowledged the progress made, stating the need to ensure that observed inflation levels accurately reflect the underlying trend. Despite the positive developments, both figures remain above the Fed's 2% target.
The Fed had raised interest rates significantly in 2022 and 2023 to curb inflation, leading to the highest levels since the 1980s. Now, policymakers are deliberating on when to adjust their stance. Powell highlighted the challenge of balancing the risks of acting too soon, potentially reigniting inflation, or delaying rate cuts, which could hinder economic growth and trigger a recession.
Market reactions were subdued following Powell's remarks, with U.S. stocks showing little change ahead of the holiday trading week. Investors anticipate the Fed to commence rate cuts in September or November, with expectations of only two reductions this year, a notable shift from earlier projections of six rate cuts starting in March.
Higher interest rates typically result in increased borrowing costs for consumers and businesses, leading to a slowdown in economic activity. The average rate on 30-year mortgages has surpassed 8% for the first time in decades, while borrowing costs for various loans such as home equity lines of credit, auto loans, and credit cards have also risen.
