WASHINGTON — Federal Reserve Chairman Jerome Powell said Tuesday that the central bank is unlikely to raise its key interest rate in response to signs of persistent inflation. He underlined his view that price increases would soon cool down again.
Still, Powell said during a panel discussion in Amsterdam that his confidence that inflation will decline “is not as high as it used to be” because price increases have been persistently high in the first three months of this year. Powell emphasized that the Fed prefers to keep interest rates at their current 20-year peak level rather than raising them.
“I don’t think it’s likely, based on the data we have, that the next step we take would be a rate hike,” Powell said. “I think it’s more likely that we’ll get to a point where we keep the policy rate where it is.”
Financial markets and economists have been hoping for signs that one or two Fed rate cuts could be coming this year as inflation has fallen sharply from 2022 highs. But with price pressures still high, Powell and Other Fed officials indicated that no interest rate cut is likely to be expected anytime soon.
Powell spoke hours after a report on U.S. producer prices showed that wholesale inflation rose in April. On Wednesday, the government will release its latest monthly report on consumer inflation, which is expected to show that price growth has cooled somewhat in the past month.
In his comments Tuesday, Powell downplayed the wholesale price report, which also showed some costs fell last month, including for airline tickets, hospital visits and auto insurance.
“I wouldn’t call it hot,” he said of the wholesale inflation data. “I would call it kind of mixed.”
Economists are divided over whether this year’s high inflation rates reflect a new acceleration in price growth or largely echo pandemic disruptions. For example, car insurance is up 22% from a year ago, but that increase may reflect factors specific to the auto industry: New car prices have soared during the pandemic and insurance companies are now trying to cover the higher repair costs. – and offset replacement costs by increasing their premiums.
Other economists point to consistent consumer spending on restaurant meals, travel and entertainment, categories where price increases have also been high in some cases, possibly due to strong demand.
Powell said upcoming inflation reports will show whether such factors keep inflation high or whether inflation will soon fall back to the Fed’s 2% target, as he expects. Inflation, which peaked at 9.1% in summer 2022, is expected to slow to 3.4% in Wednesday’s latest report.
The Fed chairman noted that rising rents are a key factor in keeping inflation high. He called this ‘a bit of a puzzle’, because measurements of new rental contracts show that new rents are hardly increasing. Such weaker figures have apparently yet to be reflected in the government’s measures, which cover all rental prices, including for tenants renewing their leases. While rents are still rising faster for tenants renewing their leases, Powell said the government’s actions should eventually see an easing in rent growth.
The Fed chairman also acknowledged that the economy “is different this time” because so many Americans refinanced their mortgages at very low interest rates before the Fed began raising borrowing costs in March 2022. Many large companies also locked in low interest rates at the time.
“It may be,” he said, that the Fed’s interest rate policy “doesn’t hit the economy as much as it would have if those two things weren’t the case.”
Last week, Fed officials underscored their willingness to leave their key interest rate at 5.3%, a 23-year high, for as long as necessary to suppress inflation.
