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Powell expects interest rates could remain high for longer

Given stubborn inflation numbers in recent months, the Federal Reserve will likely wait longer than initially expected to cut interest rates, the central bank’s two top officials said Tuesday.

As we entered 2024, policymakers were looking for evidence that inflation was continuing to cool rapidly, as it did late last year. Instead, progress on inflation has stalled or even reversed on some measures.

“Recent data clearly has not given us greater confidence and rather suggests that it will likely take longer than expected to achieve that confidence,” Fed Chair Jerome H. Powell said at an event in Washington on Tuesday .

In a separate speech on Tuesday, Fed Vice Chairman Philip N. Jefferson also said the central bank should be prepared to delay interest rate cuts if inflation remains high. “While we have seen significant progress in reducing inflation,” Jefferson said in a speech at a Fed research conference in Washington, “the job of getting inflation back to 2 percent on a sustained basis is not yet done.”

Fed officials said in December they expected to cut interest rates three times by the end of 2024 and stuck to that forecast last month despite higher-than-expected inflation numbers earlier in the year. Mr. Powell and Mr. Jefferson did not back down from that forecast on Tuesday, but they did not repeat it either.

Investors have been watching Fed officials closely in recent weeks for signs of a change in their views on when interest rate cuts might begin. At the start of the year, Wall Street analysts expected officials to begin cutting interest rates in quarter-point increments as early as the spring. That’s because the annual inflation rate has fallen steadily from a high of about 9 percent to about 3 percent, moving closer to the Fed’s target.

But progress on inflation has slowed since then. The annual inflation rate, measured by the consumer price index, rose to 3.5 percent in March. The personal consumption expenditure price index, the Fed’s preferred measure, rose 2.7 percent in February from a year earlier.

As a result, investors have repeatedly revised down their estimates at the time of the first rate cut. Hardly anyone expects the Fed to make a move at its next meeting in two weeks, and most investors no longer expect a rate cut in June. Investors now view a rate cut at the July central bank meeting as a coin toss, and many expect the Fed to wait until September or perhaps even longer.

Other economic indicators remained strong. Employment growth consistently exceeded expectations, the unemployment rate remained low and consumer spending proved robust. That has given policymakers confidence that they can keep interest rates higher without triggering a recession.

“For now, given the strength of the labor market and the progress on inflation so far, it is appropriate to give restrictive policy even more time to work and let the data and the evolving outlook guide us,” Powell said, pointing out that the Fed has the flexibility to cut interest rates if the labor market unexpectedly weakens.

At the same time, Mr. Powell said he sees signs that the labor market is rebalancing and that the forces that contributed to rapid inflation are continuing to weaken. Mr. Jefferson agreed.

“My fundamental outlook continues to be that inflation will continue to fall while the federal funds rate remains at current levels, and that the labor market will remain strong, with labor demand and supply continuing to balance,” Jefferson said.

“Of course,” he added, “the outlook is still quite uncertain and if the incoming data suggests that inflation is more persistent than I currently expect, it would be appropriate to maintain the current hawkish policy stance for longer.” “

Joe Rennison contributed to the reporting.

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