“We are back on the path to disinflation”

Federal Reserve Chairman Jay Powell said Tuesday he was encouraged by lower inflation, but reinforced that the central bank will need to see more evidence before cutting interest rates.

The last two inflation measures, in April and May, “suggest that we are returning to a disinflationary path,” Powell said on a panel in Portugal for a European Central Bank conference.

FILE - Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington, June 12, 2024. Powell will be in Portugal on Tuesday, July 2, 2024, to participate in a roundtable on central bank policy with members of the European Central Bank. (AP Photo/Susan Walsh, File)

Jerome Powell, chairman of the Federal Reserve Board. (AP Photo/Susan Walsh, File) (ASSOCIATED PRESS)

Powell’s comments come days after the latest reading of the Fed’s preferred inflation target – the “core” personal consumption expenditures (PCE) index – rose 2.6% in May, in line with expectations and down from 2.8% in April.

This is the slowest annual increase in more than three years.

On a monthly basis, inflation rose by 0.1%, also in line with expectations and down from 0.2% in April.

The reading offered fresh support for rate cuts later this year, easing concerns that grew during the first quarter that higher-than-expected inflation could upend plans to ease monetary policy in 2024.

Despite another positive signal that inflation is easing, the central bank is unlikely to cut rates at its next meeting in late July.

Powell declined to answer a question about whether the Fed could cut rates as early as September.

Instead, he stressed that the Fed will need more time and evidence that inflation is moving sustainably toward its 2% target, noting that the central bank can afford to be patient given a strong labor market that is gradually cooling.

“We’ve made a lot of progress,” Powell said. “We just want to understand that the levels we’re seeing are a true indication of what’s really happening with core inflation.”

At its last policy meeting earlier this month, the Fed raised its inflation forecast to 2.8% from 2.6% and narrowed its projection to just one rate cut this year from three previously.

Powell also declined Tuesday to discuss what Republican presidential nominee Donald Trump’s policies might mean for monetary policy.

He stressed that the Fed would continue to try to stay out of politics. He noted, however, that there is “very broad support” for an independent central bank from both political parties.

“I don’t think that’s really the case.”

Asked about the biggest risk facing the U.S. economy, Powell said he was worried about a cyberattack on a major bank or market player.

But he added that he was also thinking a lot about the need to put in place an appropriate monetary policy.

“That’s really what I think about in the wee hours of the morning.”

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