Key takeaways from Jerome Powell’s commentary after US Fed holds interest rates steady, sounds caution

Jerome Powell said that it’s not “appropriate” to loosen monetary policy until inflation falls.

The US Federal Reserve decided to maintain interest rates within the current range of 5.25 percent to 5.5 percent and adjusted its anticipated rate cuts for 2024 to only one. Policymakers at the central bank acknowledged “modest further progress” towards achieving their 2 percent inflation target. During the press conference, Federal Reserve Chair Jerome Powell emphasised that despite a decline in inflation from its highest points, the central bank remains cautious about initiating rate cuts, saying that the Fed doesn’t have the confidence to cut rates yet.

Inflation easing, but still too high

Powell highlighted strong job gains and easing inflation, though he noted inflation remains above target. Powell also pointed out improved investment in equipment and a balanced labour market with low unemployment rates. Despite signs of recovery in the labour market, Powell emphasised the need for sustained positive inflation data before considering rate cuts. He said that while "More recent readings on inflation have shown easing,” the inflation is still ‘too high’.

Jerome Powell won’t cut interest rates until inflation falls

Jerome Powell made it absolutely clear that the economic outlook is still uncertain. He added that it’s not “appropriate” to loosen monetary policy until inflation falls. “We have a strong economy,” he said, citing the strong labour market.

It will take longer than expected to gain ‘greater confidence’ that inflation moving towards 2 percent

Jerome Powell emphasised that the Fed's decision-making on interest rates hinges on achieving greater confidence in inflation approaching 2 percent, stating, "We do not expect it will be appropriate to cut rates until we have greater confidence on inflation moving toward 2%." Powell highlighted concerns over current inflation readings, stating, "So far this year, inflation readings have not given us that greater confidence.” He said that "gaining greater confidence will take longer than previously expected."

Latest inflation data fails to influence US Fed policy outcome enough

It was a rare occurrence that the US CPI inflation data for the latest month was released on the same day as the US FOMC meet outcome. The share market rallied on the softer data, even as the Fed commentary shortly thereafter tempered the jubilation just a little. How much did the new inflation data influence the Fed outcome? The Fed policy statement was tweaked to note ‘modest’ further progress following a better-than-expected inflation report. Powell noted the new reading, but kept a cautious view. Readings like these were a step in the right direction, Powell said, but said that “But one reading is just one reading. You don’t want to be too motivated by one single data point.”

Waiting longer, moving quickly on policy -- both have risks

Regarding monetary policy risks, Powell cautioned, "Reducing policy too soon or too much or too late or too little both have risks.” He added: “We are extremely aware of both those risks.” Powell reassured that "policy is well positioned to deal with risks and uncertainties we face." He confirmed the Fed's flexible approach, stating, "We will make decisions meeting by meeting." Powell also addressed the adjustment to the balance sheet, clarifying, "Slowing the pace of QT does not mean our balance sheet will shrink less than it would otherwise," and highlighted the benefits, saying, "Slowing the pace of runoff will ensure a smooth transition for money markets," and further noting, "The decision to slow runoff will reduce the possibility of money market stress."

Powell says Fed policy restrictive, but can’t say if it’s ‘sufficiently restrictive’

Jerome Powell stated that it is premature to determine whether the Fed's policy is "sufficiently restrictive." He mentioned that the Federal Reserve's intended restrictive approach to monetary policy is beginning to yield the desired impact on inflation, as indicated on Wednesday afternoon. However, Powell emphasised that central bankers are still awaiting clear evidence of adequate progress in this regard. “As time has gone by, the question of how restrictive is policy has become one that everyone is asking, and we’re asking it too, and, you know, my answer has been that policy is restrictive. The question of whether it’s sufficiently restrictive is going to be one we know over time.”

Fed prepared to adjust policy “as appropriate"

Powell took note of the current policy's impact. "Evidence is pretty clear though that policy is currently restrictive and having impact we hoped for.” He reiterated that "We are prepared to adjust policy as appropriate."