Federal Reserve Chair Jerome Powell said he was losing confidence in the prospects of inflation falling this year as he urged patience after a key gauge came in higher than expected Tuesday.
The Producer Price Index (PPI), which measures prices at the wholesale level, increased by 0.5% last month, exceeding the 0.3% estimate from Dow Jones — signaling continued pressure on consumers.
Powell said the Fed will likely have to keep decades-high interest rates at current levels for longer than initially hoped during the annual general meeting of the Foreign Bankers’ Association in Amsterdam.
“I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year,” Powell said.
Though he said “my confidence in that is not as high as it was,” given faster than expected inflation through the first three months of the year, Powell said it remained unlikely in his view that the Fed would have to raise rates any further, even if the prospect for rate cuts has become less certain.
“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,” Powell said. “It is more likely … we hold the policy rate where it is.”
Investors continue to anticipate an initial rate cut in September.
The Fed’s benchmark policy rate has been held steady in a 5.25% to 5.5% range since July, and officials have largely dropped specific guidance on whether that might be reduced this year.
The markets remained mostly flat after Powell’s comments, while awaiting Wednesday’s release of consumer prices in April.
Powell spoke just hours after the Bureau of Labor Statistics released data showing that wholesale prices rose more than expected in April amid strong gains in the costs of services like portfolio management and hotel accommodation — indicating that inflation remained stubbornly high early in the second quarter.
Excluding food and energy prices, core PPI was also up 0.5% – above the Dow Jones estimate of 0.2%.
When trade services were excluded from core PPI, wholesale prices were up 0.4% last month.
Year over year, wholesale inflation rose 2.2% in April, while core PPI minus trade services was up 3.1% – the highest in a year for both.
When asked about the latest PPI numbers, Powell said they were “mixed.”
The latest data “has told us…we’ll need to be patient and let restrictive policy do its work,” Powell said.
Powell said his outlook was for continued growth and ongoing job creation bolstered by immigration.
He said he expected the economy to grow about 2% this year, slightly above the Fed’s estimates of the economy’s underlying potential, with a labor market that remains “very, very strong.”
“If you look at a broad range of data … the labor market is about as tight as it was before the pandemic in 2019. And that’s good,” said Powell, with an unemployment rate below 4% for more than two years.
The low joblessness and rising wages seen in 2019 has been cited by Powell before as a touchstone for the Fed.
The prospect of a renewed decline in inflation without a marked economic slowing has all been given a boost, Powell said, by the arrival of immigrants who helped fill a surplus of open jobs and have added to the US economy as consumers.
“We’re still getting very substantial numbers of people coming into the country and going to work,” Powell said. “Immigration is also not a policy that the Fed works on or has opinions on, but I’m just giving you the straight economics of it. People come in … They are getting work permits and they go to work and they’re paying taxes and they’re creating economic output and there are millions of them.”
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