More data of falling inflation needed before rate cut: Powell

The US central bank still needs more data before cutting interest rates to ensure that recent weaker inflation readings give a true picture of what is happening to underlying price pressures, Federal Reserve Chair Jerome Powell said on Tuesday.

Data for May showed the Fed’s preferred measure of inflation did not increase at all that month, while the 12-month rate of price increases has ebbed to 2.6%, still above the central bank’s 2% target but on the way down.

“We just want to understand that the levels that we’re seeing are a true reading on what is actually happening with underlying inflation,” Powell said at a monetary policy conference in Portugal sponsored by the European Central Bank. “We want to be more confident, and frankly because the US economy is strong... we have the ability to take our time.” Powell would not comment on when US rate cuts might begin, but acknowledged the Fed has entered a sensitive phase in its policy deliberations where the risks to both its inflation and employment goals “have come back much closer to balance.”

In particular, some closely watched measures of the job market suggest the US economy may be approaching a point where further progress on inflation will involve the sort of tradeoffs with rising unemployment that the Fed has so far avoided.

“You can’t know that with precision,” Powell said, “but it is understood that we have two-sided risks.” “Given the strength we see in the economy we can approach the question carefully,” Powell said, while also noting that policymakers don’t want to keep policy too tight for too long and “lose the expansion.” At the same time, progress in lowering inflation moving forward is expected to be slow, with a return to the Fed’s target not expected to occur until late next year or in 2026.

Powell said he anticipated headline inflation to still be between 2% and 2.5% a year from now, and that he would regard that as a “great outcome.” US short-term interest-rate futures were little changed on Tuesday, with prices continuing to imply that the Fed would deliver its first rate cut in September and a second one in December.

The Fed has kept its benchmark policy interest rate steady in the 5.25%-5.5% range since last July, but officials are debating when to ease monetary policy as inflation edges back to the central bank’s 2% target.

Inflation is still 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 most recent data on inflation and overall economic activity, however, suggest that price pressures may be easing further.

Whether the Fed ends up cutting in September or winds up on a more delayed timetable will hinge on coming employment and inflation reports, including the release on Friday of the monthly employment report for June and the July 11 release of the consumer price index for June.

While the timing of an initial rate cut may matter little to the larger economic outcomes the Fed is seeking, policymakers are attuned to the risk of keeping tight monetary policy in place too long - and putting the current low unemployment rate at risk if the economy slows too much or too fast - and are also sensitive to the signal they will send by cutting rates.

Job openings rise: US job openings rose slightly to 8.1 million in May despite the impact of higher interest rates intended to cool the labour market.

Vacancies rose from a revised 7.9 million in April, the first reading below 8 million since February 2021, the labour Department reported Tuesday. April openings were marked down from an originally reported 8.1 million.

Layoffs rose to 1.65 million in May from 1.54 million in April. The number of Americans quitting their jobs - a sign of confidence in their prospects - was basically unchanged.

“The report was another sign that the labour market is holding firm … The expansion looks solid,’’ said Robert Frick, economist at the Navy Federal Credit Union.

The US economy and job market have been remarkably resilient in the face of the Federal Reserve’s campaign to raise interest rates to rein in inflation. The Fed hiked its benchmark rate 11 times in 2022 and 2023, lifting it to a 23-year high.

Defying expectations of a recession, the US economy kept growing and employers kept hiring.

But lately there have been signs the economy is losing some steam. Job openings have come steadily down since peaking at 12.2 million in March 2022. The job market is still strong. There are 1.25 jobs for every unemployed American, but that’s down from a 2-to-1 ratio in January 2023.

Fed policymakers welcome lower job openings - a relatively painless way to cool a hot job market and reduce pressure on companies to raise wages, which can feed inflation.

From January through March this year, the economy grew at an annual pace of just 1.4%, slowest since spring 2022. Consumer spending, which accounts for around 70% of US economic activity, expanded just 1.5% after advancing at a pace of more than 3% in each of the last two quarters of 2023.

The labour Department is expected to report Friday that employers added 190,000 jobs last month, down from 272,000 in May, according to a survey of forecasters by the data firm FactSet. Unemployment is forecast to stay low at 4%.

High interest rates have helped bring inflation down closer to the Fed’s target of 2% a year from a four-decade high 9.1% in June 2022. Progress on containing price increases is expected to allow the central bank to start cutting rates. Wall Street investors are expecting the first rate cut at the Fed’s September meeting.

Speaking at a conference in Portugal Tuesday, Fed Chair Jerome Powell said that progress toward lower inflation appears to have resumed after stalling earlier this year. But he said the Fed needed to see more evidence before it cuts rates.

Agencies