Key Points

  • Federal Reserve Chair Jerome Powell said Tuesday that upside surprises in inflation this year could force the central bank to keep interest rates at a 23-year high for longer than expected, adding that the probability of another rate hike is "very small."
  • "Based on the data we have, I think the next move is unlikely to be a rate hike," Powell said. "It's more likely that we will hold the (monetary) policy rate where it is."
  • "By many, many measures, the policy rate is restrictive," with the current range at 5.25% to 5.5%, "the real question is keeping the policy rate at its current level for longer than previously thought."

In-Depth Analysis

The median forecast of Fed officials in March showed the central bank cutting its key interest rate three times this year in 25-basis-point increments. However, since then, data have shown persistent inflationary trends in prices paid by consumers and producers. The Fed's preferred inflation gauge—the core personal consumption expenditures price index, which excludes food and energy—rose at an annualized rate of 3.7% last quarter, well above the central bank's 2% target.

Policymakers held the federal funds rate steady on May 1 and noted little recent progress in the more-than-two-year fight against inflation. They said they need to havegreater confidence。

"We've been at the highest interest rate level for some time," Powell said Tuesday. "I think restrictive monetary policy may take longer than expected to work and bring down inflation." He added: "The question is, 'Is policy restrictive enough?' I think that question will take time to answer."

When referring to the possibility of another rate hike, Powell said, "It could be a very small probability." At the same time, he said his confidence that the Fed will slow inflation to 2% has weakened compared with earlier this year.

CEOs and consumers are also showing less optimism about whether price pressures can reverse quickly.

A quarterly CEO survey released Monday by the Cleveland Fed showed that CEOsexpect inflation of 3.8% over the next year, up from 3.4% three months ago. In the previous five surveys, they had lowered their inflation expectations.

Meanwhile, the New York Fed said Monday that, according to its Survey of Consumer Expectations, consumersexpect inflation of 3.3% over the next 12 months—up from 3% in March—the highest in five months. Over a five-year horizon, inflation expectations rose to an annual rate of 2.8% from 2.6%.

A survey by the University of Michigan earlier this month also showed rising consumer pessimism about price pressures. University researchers said last Friday they expect inflation of 3.5% over the next 12 months, up from last month's forecast of 3.2%(Source)。

Inflation expectations can have a snowball effect, making them particularly important when Fed officials consider adjusting monetary policy.

Speaking about rising food prices in recent years, Powell said: "People are upset, and I fully understand that." "You tell people inflation is coming down, and they think: 'I don't understand—the prices of everything I buy haven't come down,'" Powell said. "They are suffering."