Federal Reserve Chair Jerome Powell recently spoke about the challenges of achieving the inflation objective and highlighted the need for greater confidence before considering policy adjustments. Despite inflation remaining at 2.8% in March, Powell emphasized that the Fed requires more certainty before making any changes.
During a discussion on U.S. and Canadian economic policies, Powell expressed concern over recent data, stating that it is likely to take longer than expected to achieve the desired level of confidence in inflation. However, he also reassured that the current policy stance is well-positioned to handle potential risks and has the flexibility to adjust if necessary.
Powell further emphasized the Federal Reserve’s commitment to returning inflation to the target rate of 2% sustainably over time. He described the current state of the U.S. economy as strong, with a growth rate exceeding 3% in the past year. This growth was driven by robust spending, employment gains, and a decline in inflation.
The labor market was also a topic of discussion, with Powell noting consistent job gains and low unemployment rates persisting for an unprecedented 26 months below 4%. However, he mentioned a gradual normalization in the labor market, evident through indicators such as job openings and workforce participation rates returning to pre-pandemic levels. Wage pressures were observed to be moderating gradually as well.
In terms of inflation markers, recent data showed that the U.S. annual inflation rate came in higher than expected for the fourth consecutive month in March. The consumer price index (CPI) rose to 3.5%, surpassing the consensus estimate of 3.4%. Gasoline and shelter prices were the main contributors to the increase in inflation.
The energy index rose by 1.1% monthly, with gasoline prices surging by 1.7%. Shelter prices also continued to trend higher, rising by 0.4% monthly and 5.7% year over year. Food inflation remained relatively unchanged, increasing by 0.1% monthly and 2.2% compared to the previous year.
Services, particularly transportation and medical care, also experienced significant increases. Transportation services soared by 1.5% from February to March and by 10.7% in the 12 months ending in March. Medical care services rose by 0.6% monthly.
The Fed’s preferred supercore inflation ex-housing metric accelerated to 4.8% and rose by 0.4% monthly.
Overall, Powell’s remarks highlighted the challenges of achieving the inflation objective and the need for greater confidence before making any policy adjustments. While the U.S. economy has shown strength in terms of growth and the labor market, gradual normalization and moderation in wage pressures have been observed. The recent data on inflation indicate a longer-than-expected timeline for achieving the desired level of confidence, but Powell expressed confidence in the current policy stance’s ability to handle potential risks.
