Federal Reserve chair Jerome Powell has acknowledged the progress in disinflation in the United States but also reiterated that the central bank still needs more evidence of inflation falling before it will cut interest rates.
Inflation remains more than half a percentage point above the Fed’s 2% target, according to its preferred inflation gauge the personal consumption expenditures (PCE) price index.
Speaking on a panel in Sintra, Portugal for a European Central Bank monetary policy conference on Tuesday, Powell acknowledged that the last two inflation readings in April and May did “suggest that we are getting back on a disinflationary path.”
“We’ve made a lot of progress,” he said. "We just want to understand that the levels that we're seeing are a true reading on what is actually happening with underlying inflation.”
He added that because of the strength of the US economy, the central bank has the ability to “take our time” on rate cuts, declining to answer a question about whether the Fed would cut rates as soon as September.
Pepperstone senior research strategist Michael Brown highlighted that Powell’s comments were “a touch more dovish than those made of late.”
“Commentary of this ilk appears to further open the door to a September rate cut, especially with Powell also flagging the risk associated with leaving it too late to deliver the first rate reduction,” Brown said.
“A softer-than-expected jobs report on Friday, were it to come to pass, would likely further cement the case for said cut, to which markets assign a roughly 70% chance - perhaps, a touch underdone.”
Stocks were flat to modestly higher following Powell’s comments, with the Dow Jones flat at 39,164 points, the S&P 500 up 0.1% at 5,483 points, and the Nasdaq up 0.3% at 17,927 points shortly before noon Tuesday.
“Naturally, risk sentiment has been given a lift by Powell's comments, with equity futures back into positive territory on the day; dip buyers continue to rule the roost, with the medium-run path of least resistance continuing to lead to the upside, ably assisted by the ongoing 'Fed put', and policymakers clear desire to deliver a 25 basis point cut - and more beyond that - sooner rather than later,” Brown commented.