ISTANBUL
US Federal Reserve Chair Jerome Powell said Wednesday that inflation is still too high, with ongoing progress to bring it down not assured and the path forward uncertain.
Powell said the Federal Open Market Committee (FOMC) believes the policy rate is "likely" at its peak in the monetary tightening cycle and added in a remark certain to be closely analyzed that "if the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year."
The Fed on Wednesday kept its federal funds rate unchanged, as expected, in the 5.25%-5.5% target range – the highest level in nearly a quarter century.
The committee, however, gave no hints about when it will begin to lower interest rates this year.
"In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent," it said in its latest statement.
Powell said in his post-meeting news conference that "reducing policy restraint too late or too little could unduly weaken economic activity and employment."
"The economy has surprised forecasters in many ways since the pandemic. Ongoing progress towards our 2% inflation objective is not assured. The economic outlook is uncertain," he said.
The American economy expanded 3.3% in the fourth quarter, beating market estimates of 2%, but it slowed down from 4.9% GDP growth in the third quarter. Overall, the US economy grew 3.1% over the last year, also above expectations.
Powell stressed that the committee will make its monetary policy decisions on a meeting-by-meeting basis.
Wanted: More good economic data
About gaining greater confidence in monetary policy adjustments, Powell said the Federal Open Market Committee wants to see the "continuation of more good (macroeconomic) data," and a good example of this was six months of "good" inflation figures.
"That is sending us a good signal that we are in fact on a sustainable path down to 2% inflation," he said.
On when interest rate cuts might begin, Powell said the committee has not yet started to consider the topic, adding: "We’re not really at that stage. There was no proposal to cut rates," and added: "We weren't actively considering moving the federal funds rate down."
"If we saw an unexpected weakening certainly in the labor market, that would certainly weigh on cutting (rates) sooner," he said. "And if we saw inflation being stickier or higher, (that) would argue for moving later."
Powell also said it is too early to declare victory about achieving a “soft landing” – a situation where a central bank manages to bring down inflation and cool down a hot economy but avoids a recession.
"Certainly, I’m encouraged, and we’re encouraged by the progress,” he said about the performance of the American economy, but added: "We think we have a ways to go."
"The economy is broadly normalizing, and so is the labor market. That process will probably take some time...Wage increases are still at a very healthy level," he said.
Powell, however, stressed that inflation regaining pace could be seen as a risk but said the greater risk would be inflation stabilizing at a level meaningfully above 2%.
"If inflation were to surprise by moving back up, we would have to respond to that, and that would be a surprise at this point. But I have to tell you that’s why we keep our options open here and why we’re not rushing," he said.
Level of confidence by March unlikely
"We are going to be data dependent," Powell said about when the first interest rate cut would happen.
"Based on the meeting today, I would tell you that I don't think it is likely that the Committee would reach a level of confidence by the time of the March meeting, but that's to be seen."
The Fed chair, however, did not provide a clear answer whether the first rate cut would be the start of an interest rate cutting cycle or just be considered a single cut but said that too will depend on incoming macroeconomic data.
He reiterated that incoming macroeconomic data will determine when the rate cuts would begin, saying "good" inflation figures would signal the need for faster interest rate cuts, while high inflation numbers could warrant rate cuts to come at a slower pace.
"We’re trying to get comfortable and gain confidence that inflation is on a sustainable path down toward 2%," Powell said.
“We’ve had inflation come down without a slow economy and without important increases in unemployment. There’s no reason why we should want to get in the way of that process if it is going to continue,” he said.
"Continued declines in inflation are really the main thing we are looking at. Of course, we want the labor market to remain strong too," he added.
