Fed Chief Not Ready to Lower Interest Rate Until Inflation Is Under Control

Federal Reserve Bank Chair Jerome Powell speaks during the Stanford Business, Government, and Society Forum at Stanford University in Stanford, Calif., on April 3, 2024. (Justin Sullivan/Getty Images)

Federal Reserve Chair Jerome Powell is unsure if the back-to-back, hotter-than-expected inflation readings are something more than just a bump in the road.

In prepared remarks at Stanford University on April 3, the central bank chief reiterated that it would be inappropriate for monetary policymakers to cut interest rates.

“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Mr. Powell stated. “We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent.”

He noted that the policymaking Federal Open Market Committee (FOMC) maintains the latitude of being patient and allowing “incoming data to guide our decisions on policy.”

While the various inflation metrics topped market expectations, the Fed chair conceded that the latest information doesn’t constitute a “material change [to] the overall picture.”

Investors are pricing in a June rate cut, but Mr. Powell stressed that decisions are made on a “meeting by meeting” basis. At the same time, he said that cuts to the benchmark federal funds rate are “likely to be appropriate at some point this year,” as he doesn’t believe that “inflation is reversing higher.”

According to the CME FedWatch Tool, traders have signaled that there is a 62 percent chance of the first rate cut happening in June.

However, because of the revival of inflation concerns, there has been uncertainty in the broader financial markets, with U.S. Treasury yields climbing again.

The benchmark 10-year yield is above 4.35 percent, while the two-year yield sits at about 4.68 percent.

Mr. Powell’s comments come soon after the updated March Summary of Economic Projections (SEP), which shows that Fed officials still expect three quarter-point rate cuts this year as the median policy rate slides to 4.6 percent by the year’s end.

What Other Fed Officials Say

Over the past week, there have been mixed opinions emanating from Fed officials.

Federal Reserve Bank of Cleveland President Loretta Mester told the National Association for Business Economics in Cleveland on April 2 that she wouldn’t rule out a 25-basis-point decrease in the policy rate in June. She still anticipates three cuts this year.

“If the economy evolves as expected, then, in my view, it will be appropriate for the FOMC to begin reducing the fed funds rate later this year,” Ms. Mester said in a speech.

She conceded that it would be a “close call” as to whether fewer rate cuts are required.

At an event in Las Vegas, San Francisco Fed President Mary Daly admitted that bringing inflation in line with the central bank’s 2 percent target is a “slow” and “bumpy” process. Since the economy and labor market are performing better than expected, “there’s really no urgency to adjust the rate.”

There is a “real risk” of pivoting too soon and installing a “toxic tax” of above-trend inflation, Ms. Daly said.

Raphael Bostic, who heads the Atlanta Fed, told CNBC on April 3 that he sees only a single rate cut this year, which will occur in the fourth quarter. Ultimately, it will depend on the data, he noted.

“I think it would be appropriate for us to start moving down at the end of this year, the fourth quarter,” Mr. Bostic said.

“The road is going to be bumpy, and I think if you’ve looked over the last several months, inflation hasn’t moved very much relative to where we were at the end of 2023. There are some secondary measures in the inflation numbers that have gotten me a bit concerned that things may move even slower.”

The State of Inflation

Last month, the annual inflation rate rose to 3.2 percent, up from 3.1 percent in January and higher than economists’ expectations of 3.1 percent.

The Producer Price Index (PPI), which gauges the prices that businesses pay, climbed unexpectedly by 0.6 percent in February, the biggest monthly increase since August 2023. In addition, this surpassed the consensus estimate of 0.3 percent.

In February, the Fed’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose to 2.5 percent. Core PCE, which excludes the volatile food and energy components, dipped to 2.8 percent, as expected.

Looking ahead, the Cleveland Fed’s Inflation Nowcasting model suggests that the March Consumer Price Index (CPI) will rise to 3.4 percent. The PCE is seen edging up to 2.6 percent.

As Mr. Bostic mentioned, various nonheadline metrics are proving to be cause for concern.

The Atlanta Fed’s gauge of 12-month “sticky” inflation was well above 4 percent.

The widely watched supercore inflation, which gauges services excluding housing, rose by 0.5 percent monthly and was unchanged at 4.3 percent year over year. However, on a three-month annualized basis, supercore inflation advanced to 6.9 percent. The six-month metric clocked in at 5.6 percent, up from 2.8 percent in August 2023.

SEP data suggest that the Fed doesn’t expect PCE to ease to 2 percent until 2026.

The next two-day FOMC policy meeting is scheduled for April 30 and May 1.