One day before the release of the Consumer Price Index (CPI) for April, the chairman of the Federal Reserve Board, Jerome Powell, spoke about inflation.
At an event sponsored by the Foreign Bankers’ Association in Amsterdam on Tuesday, Powell offered more of a glass-half-full take on the economy. However, he also called for patience on the effects of U.S. monetary policy in bringing down inflation and even offered some commentary on what the Fed might do next on interest rates.
Labor market moving into better balance
On the economy, Powell said it has been performing “very well lately,” driven by a strong labor market, rising income levels, strong consumer spending and robust business investments. He added that consumers are generally not over-levered, or in layman’s terms, carrying too much debt. Powell also cited the contributions of a “large influx of immigration into the country in the past couple of years,” and many of these immigrants are joining the labor force.
“We’re experiencing, still, a labor shortage in many industries, so there are jobs, and they [immigrants] are going to work, and they are consuming, so that’s also boosting growth. So overall a good picture,” he said.
Overall, the Fed chair said the labor market is very strong but is moving back into a better balance between the supply and demand for workers.
“You could say the labor market is about as tight as it was before the pandemic in 2019, and that’s good,” Powell added.
Q1 inflation: “Higher than we expected”
On inflation, Powell noted the great progress that has been made in lowering it, particularly in the second half of 2023. However, that momentum slowed in the first quarter of 2024.
“The first quarter in the United States was really notable for its lack of further progress on inflation. We had a higher reading in the first quarter, higher than we expected,” Powell said. “We did not expect this to be a smooth road, but these [inflation numbers] were higher than I think anyone expected, so what that has told us is we need to be patient and let restrictive policy do its work.”
Powell also offered his own outlook, saying he expects economic growth of at least 2%, the labor market to remain strong but move further into balance, and inflation to “move back down on a monthly basis to levels that were more like the lower readings we were having last year.” However, he added that his confidence is not as high as it was after seeing interest rates tick up in the first quarter.
“We’re just going to have to see where the inflation data falls,” Powell concluded.
As for the next potential move on interest rates, Powell did offer some additional color.
“I don’t think that it is likely based on the data we have that the next move that we make will be a rate hike,” he said, according to Reuters. “It is more likely … we hold the policy rate where it is.”
