Fed Chairman Powell says inflation has been higher than expected

Federal Reserve Chairman Jerome Powell reiterated Tuesday that inflation will fall slower than expected and will keep the central bank on hold for an extended period.

Speaking at the annual general meeting of the Association of Foreign Bankers in Amsterdam, the central bank leader noted that the rapid disinflation that occurred in 2023 has slowed significantly this year and led to a rethink of the direction of policy.

‘We didn’t expect this to be a smooth road. But this [inflation readings] were higher than I think anyone expected,” Powell said. “What that has told us is that we need to be patient and let the restrictive policies do their work.”

While he expects inflation to fall over the course of the year, he notes that this has not happened so far.

“I think it’s really a matter of keeping policy at the current pace for longer than expected,” he said.

However, Powell also reiterated that he does not expect the Fed to raise rates.

The Fed has kept its key overnight interest rate within a target range of 5.25%-5.5%. Although the figure has been there since July, it is the highest level in about 23 years.

“Based on the data we have, I don’t think the next step we would take would be a rate hike,” he said. “I think it’s more likely that we’ll get to a point where we can keep the policy rate where it is now.”

Markets wavered when Powell spoke around 10 a.m. ET and major averages were close to breakeven around noon ET. Treasury yields fell slightly, and futures traders slightly increased the market-implied probability of a first Fed rate cut in September.

Powell’s comments echoed sentiments he expressed during his May 1 press conference after the most recent meeting of the Federal Open Market Committee.

The committee voted unanimously to maintain the interest rate line, but also said there was a “lack of further progress” in bringing inflation back to the Fed’s 2% target, despite a series of 11 rate hikes.

Tuesday brought another round of discouraging inflation data as the Labor Department’s Producer Price Index, a measure of wholesale costs, rose a higher-than-expected 0.5% in April due to a surge in services prices.

While the index on the surface indicated further price pressure, Powell called the report “mixed” as some components showed some easing.

‘Will inflation be more persistent in the future? … I don’t think we know that yet. “I think we need more than a quarter of data to really make a judgment on that,” he said.