© Reuters. The Federal Reserve Building stands in Washington April 3, 2012. REUTERS/Joshua Roberts/File Photo
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By Howard Schneider and Ann Saphir
WASHINGTON (Reuters) -Federal Reserve Chair Jerome Powell said on Wednesday recent high inflation readings had not changed the underlying “story” of slowly easing price pressures in the U.S., but added that recent data also had not bolstered the central bank’s confidence that the inflation battle has been won.
Powell, speaking after a policy meeting at which officials left rates unchanged and held onto their outlook for three cuts in borrowing costs this year, said the timing of those reductions still depended on officials becoming more secure that inflation can continue to decline towards the Fed’s 2% target in an economy that continues to outperform expectations.
Inflation reports at the beginning of the year showed price pressures remained “elevated,” in the Fed’s view, but “haven’t really changed the overall story, which is that of inflation moving down gradually on a sometimes bumpy road to 2%,” Powell told reporters. “I also don’t think that those readings added to anyone’s confidence” of a continued decline in inflation.
The decision on when to cut rates will depend on more data, Powell said, to determine if the disappointing readings that started the year continue.
“We want to be careful,” the Fed chief said, reiterating a go-slow approach to rate cuts that has been buttressed by the economy’s ongoing strength, leaving officials in no rush to ease monetary policy while the economy and the job market continue to grow.
While officials affirmed their view for three rate cuts this year, they also upgraded their outlook for economic growth and projected slightly slower progress on inflation over the course of the year.
The Fed’s benchmark overnight interest rate, as expected, was held steady on Wednesday in the 5.25%-5.50% range where it has been since July.
The updated quarterly economic projections showed the personal consumption expenditures price index excluding food and energy rising at a 2.6% rate by the end of the year, compared to 2.4% in the projections issued in December.
Nevertheless, 10 of the Fed’s 19 officials still see the policy rate falling by at least three-quarters of a percentage point by the end of this year, a median view first set in December and maintained despite recent stronger-than-expected inflation.
U.S. stocks extended their gains following the release of the Federal Open Market Committee’s policy statement while the U.S. dollar slipped against a basket of currencies. U.S. Treasury yields fell. Investors strengthened bets of a first rate cut in June.
“The May meeting is not live for a cut, barring a financial accident, as the Committee continue to seek further confidence that inflation is returning to target before firing the starting gun on the easing cycle,” said Michael Brown, a market analyst at Pepperstone.
Back in December, eleven officials had seen three quarter-percentage-point cuts on tap for the year, and the new policy view came alongside an upgraded outlook for the economy. Growth is now seen at 2.1% for the year compared to just the 1.4% projected in December, while the unemployment rate is seen ending the year at 4%, lower than the 4.1% anticipated in December and barely changed from the 3.9% jobless rate recorded in February.
LONGER-RUN RATE HIGHER
One key measure, the longer-run policy rate, was moved higher by a tenth of a percentage point, from 2.5% to 2.6%, reflecting the views of some Fed officials that the economy can support higher interest rates overall in the future.
The Fed kicked off an aggressive monetary policy tightening cycle two years ago in response to a surge in inflation that would eventually hit a 40-year peak, but it has kept its policy rate in the current range since last July.
The latest projections show the median policymaker expects the Fed’s benchmark overnight interest rate to fall three-quarters of a percentage point in 2025, less than the 1 percentage point projected in December as part of a slightly slowed rate cut path, and by three-quarters of a point in 2026 as well, the same as anticipated previously.
“Economic activity has been expanding at a solid pace. Job gains have remained strong and the unemployment rate has remained low,” the Fed said in its unanimously approved statement after the end of a two-day meeting.
The statement also repeated that officials are still seeking “greater confidence” in a continued decline of inflation before they begin cutting interest rates, language adopted at the Fed’s Jan. 30-31 meeting that is likely to stay in place until just before the first rate reduction.
Investors ahead of the meeting had settled firmly on an anticipated June start to rate cuts. That view was largely reinforced by the outcome of the meeting, but it also leaves the median rate outlook near a tipping point, a fact that could give outsized influence to upcoming inflation reports.
