Federal Reserve Chairman Jerome H. Powell reiterated that authorities were prepared to keep interest rates steady at a high level while awaiting evidence that inflation was slowing further.
Federal Reserve officials entered 2024 expecting to make interest rate cuts, having sharply raised borrowing costs to a more than two-decade high of 5.3 percent between 2022 and the middle of last year. But the stubbornly rapid inflation of recent months has upset that plan.
Central bankers have been clear that rate cuts this year are still possible, but they have also signaled that they plan to leave interest rates unchanged for now while they wait to make sure inflation is truly under control.
During a panel discussion in Amsterdam, Powell said officials had been surprised by the recent inflation readings. The Consumer Price Index inflation measure, due to be released on Wednesday, fell rapidly in 2023 but has stuck above 3 percent this year. The Fed’s preferred measure, the Personal Consumption Expenditures index, is a bit colder, but it also remains well above the Fed’s 2 percent inflation goal.
“We didn’t expect this to be an easy ride, but I think they were higher than anyone expected,” Powell said Tuesday of the recent inflation readings. “What that has told us is that we will have to be patient and let the restrictive policies do their job.”
Powell said he expected continued growth and a strong labor market in the coming months, and that he believed inflation would begin to slow again.
But, he said, “my confidence in that is not as high as it was before, having seen these readings in the first three months of the year.”
The chairman of the Federal Reserve made it clear that further interest rate increases are not expected, although they are not impossible. He said there was a “very small chance” that the Fed would have to consider a hike again, but that he didn’t think that was the most likely outcome.
“It’s really about keeping policy at its current pace for longer than previously thought,” Powell said. “The question is: Is it restrictive enough? I think that will be a question that time will tell.”
The Federal Reserve chair said he still expected rents, a major driver of recent inflation, to eventually slow price increases. But he acknowledged that the cooling is taking longer than expected.
He also noted that the policy could take longer to work this time, in part because homeowners and businesses set interest rates very low when borrowing costs were at rock bottom in the 2010s and 2020s.
“The American economy is different this time,” Powell said.
Still, he repeatedly said he thought interest rates were high enough to gradually weigh on growth and eventually cause inflation to come down completely.
“Initially, we were very concerned that the very high inflation we saw might be quite difficult to reduce without a very significant decline in employment and a weakening of economic activity; that didn’t happen, it’s just a great result,” said Mr. Powell said.
Although inflation has dropped substantially from its 2022 highs, Americans are unhappy with the state of the economy, a fact made clear by low levels of consumer confidence. Powell attributed that dissatisfaction to continued high price levels.
Since inflation measures changes in prices, slower inflation simply means that prices are no longer rising as quickly, not that they are falling after their rapid rise in 2021 and 2022.
“You tell people, ‘Inflation is going down,’ and they think, ‘I don’t get it,’” Powell said. “Especially people at the lower end of the income spectrum are hit hard by inflation, right from the start, which is why we are so committed to restoring price stability and maintaining it.”