WASHINGTON — Chairman Jerome Powell said Monday the Federal Reserve is increasingly confident that inflation will return to its 2% target. He said the Fed would cut rates before price increases actually reach that point.
“We’ve had three better readings, and if you average them out, that’s a pretty good pace,” Powell said of inflation in a question-and-answer session at the Economic Club of Washington. Those numbers, he said, “add some confidence” that inflation is coming down sustainably.
Powell declined to give any hints about when the first rate cut would come. But most economists expect the first cut to come in September, and after Powell’s comments, Wall Street traders raised their expectations that the Fed would then cut its key rate from its 23-year high. Futures markets are expecting additional rate cuts in November and December.
“Today,” Powell said, “I’m not going to be sending any signals about any particular meeting.”
Fed rate cuts would eventually lower borrowing costs for consumers on things like mortgages, auto loans and credit cards.
Last week the government reported that consumer prices turned down slightly from May to June, bringing inflation down to a year-on-year rate of 3%, from 3.3% in May. So-called “core” prices, which exclude volatile energy and food costs and often provide a better picture of where inflation is likely to be headed, rose to 3.3% from a year earlier, down from 3.4% in May.
Powell stressed in his speech Monday that the Fed doesn’t have to wait until inflation actually hits 2% to lower borrowing costs.
“If you wait until inflation has come down to 2%, you’ve probably waited too long,” Powell said, because it takes time for Fed policies to have an effect on the economy.
Powell also commented on the attempted homicide from former President Donald Trump on Saturday, saying it was a “sad day for our country” and adding that violence has no place in American politics.
After several high inflation numbers raised some concerns early in the year, Fed officials said they would need several months of declining price numbers to ensure inflation was on a sustained decline toward its target level. June was the third straight month of slowing annual inflation.
After the government’s latest encouraging inflation report on Thursday, Mary Daly, president of the Fed’s San Francisco office, signaled that rate cuts were looming. Daly said it was “likely that policy adjustments will be needed,” though she did not provide a specific timing or number of rate cuts.
On a call with reporters, Daly struck an optimistic tone, saying the June consumer price report showed that “we’re seeing a gradual reduction in inflation that we’ve been watching and looking forward to, which … actually increases confidence that we’re on track to 2% inflation.”
Many of the factors driving price increases are waning, bolstering the Fed’s confidence that inflation is fully under control after it steadily declined from a 40-year peak in 2022.
Thursday’s inflation report reflected a long-awaited drop in rent and housing costs, which had skyrocketed in the wake of the pandemic as many Americans sought larger living spaces to work from home.
Hiring and vacancies are also cooling, reducing the need for many companies to raise wages to fill vacancies. Sharply higher wages could fuel inflation as companies respond by raising prices to cover their higher labor costs.
Last week, Powell noted before a Senate committee that the labor market had “cooled significantly” and was “not a source of broad inflationary pressures for the economy.”