– First Quarter Inflation Data Hurt His ‘Confidence” that Disinflation Will Resume
– Will Take Longer to Become Confident Inflation Is Coming Down Over Time
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell did not rule out raising short-term interest rates to bring inflation down to the Fed’s 2% target, but said it is more likely the Fed will just have to keep monetary policy in its current “restrictive” stance for longer than once projected.
Powell boasted of the reduction of inflation achieved in the second half of last year and said he expects that disinflation trend to resume but admitted that first quarter inflation data had hurt his confidence in that outcome.
He described a worse than expected April producer price index report as “quite mixed” in remarks at the annual meeting of the Foreign Bankers’ Association.
Powell essentially repeated what he said after the May 1 meeting of the Fed’s policymaking Federal Open Market Committee, when the FOMC left the federal funds rate in a 5.25% to 5.50% target range for the sixth straight meeting and said it would keep that key money market rate at that level “until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Powell again described monetary policy as “restrictive,” but said it remains to be seen whether it is restrictive enough.
“By any measure policy is restrictive; the question is whether it is sufficiently restrictive,” he said.
Asked whether the FOMC might need to raise the funds rate, Powell replied that a rate hike is “a small possibility,” but repeated what he said in his May 1 press conference — that “it is not likely the next move we make would be a rate hike.”
More likely is that the FOMC will “hold policy rate where it is,” he added.
Powell, who was making a joint appearance with De Nederlandsche Bank President Klaas Knot, again emphasized that the Fed is committed to getting inflation down to 2% by keeping policy “restrictive.”
To achieve that goal, he said, “It’s probably a matter of just staying at that stance for longer.”
“Ultimately we will do what we need to do to get inflation down to 2%,” Powell asserted.
After making “real progress on inflation” last year, he said “the first quarter was notable for lack of further progress.”
The worse than expected first quarter data, which showed inflation averaging more than 3 ½% at an annual rate, showed that the FOMC must “be patient and let restrictive policy do its work,” he said.
Powell said he still expects inflation “to move back down” to a pace “more like (the second half of ) last year,” but said “my confidence in that is not as high as it was. We’re just going to have to see how it plays out.”
“At the present time policy is restrictive, and it (probably will) take longer for us to become confident that inflation is coming down over time,” he reiterated.
Earlier, the Labor Department reported that its producer price index rose a worse than expected 0.5% in April, following a downwardly revised 0.1% March rise.
Powell described the PPI report as “quite mixed.” Pointing to revisions to prior months, he called it “not hot, but mixed.”
Regarding the first quarter readings on the consumer price index and the price index for personal consumption expenditures (PCE), Powell said “I did not expect a smooth road,” but said the first quarter data were more “bumpy” than he had expected and undermined his confidence in the inflation outlook.
The Fed chief said much of the progress against inflation last year reflected recovery from pandemic supply disruptions. He said there could be some further disinflationary benefits from the supply side, but said the Fed is now predominantly hoping that its “restrictive” monetary policy will quell demand for goods and services.
“Restrictive monetary policy cools the economy and makes room for the supply side to heal,” he said, adding that restrictive policy “lowers demand and ultimately cools inflation.”
He pointed to housing prices – “a bit of a puzzle” — as the main culprit for keeping inflation elevated, but said they should come down with a lag as rents grow less rapidly. He noted that service prices have also been slower to come down.
Powell said that not all of those three components (goods, services and housing) need to come down to 2%, so long as the three average 2%.
Meanwhile, he said the labor market remains “very strong,” but he said it is “gradually coming back into balance” after earlier being “overheated.”
Powell downplayed concerns about the putative “neutral rate” or the so-called r* — the economy’s real equilibrium short-term interest rate.”
“The r * debate runs in the background, but it’s a longer run concept,” he said. Rather, “we think about the effect of the things we’re doing on financial conditions and the economy — how they’re affecting the economy and why.”
Asked about record federal budget deficits and the mounting national debt, Powell said “U.S. fiscal policy is on an unsustainable path.”