Powell: In the first quarter, inflation has made little progress, the Fed needs to be patient, waiting for more evidence of inflation cooling

On Tuesday, Federal Reserve Chairman Powell stated at an event hosted by the Foreign Bankers Association in Amsterdam that the Fed needs to remain patient, waiting for more evidence that high interest rates are curbing inflation and that inflation continues to cool, therefore needing to keep rates high for a longer period.

First-quarter data undermines Powell's confidence in inflation

Powell stated that he expects inflation to trend lower, but the first-quarter inflation data this year has undermined his confidence, making it difficult for the Fed to determine whether or when to lower rates. In line with previous statements, he said recent inflation data in the United States suggests that it may take more time than previously imagined to gain the confidence needed to lower rates:

In 2023, there was progress on inflation, but it is clear that inflation in the first quarter of this year did not make further progress. We did not expect it to be a flat road, but these numbers are higher than anyone anticipated. This tells us that we need to be patient and let restrictive policies take effect.

It seems we will need more time to have confidence that the inflation rate will gradually decline to 2%.

We just need to look at the results of the inflation data.

Regarding specific aspects of inflation, Powell mentioned that housing inflation has been somewhat puzzling. The current rise in rents has a longer lag effect on CPI data than we originally thought. I originally thought that resolving service inflation would be the longest. Powell also mentioned that service inflation does not need to fall to 2%.

Powell comments on the latest PPI

Earlier on the same day, data released by the U.S. Bureau of Labor Statistics showed that, adjusted for seasonal factors, the U.S. PPI for April rose by 0.5% compared to the previous month, higher than the revised -0.1% in March and exceeding expectations of 0.3%; the PPI rose by 2.2% year-on-year, slightly higher than the previous value of 2.1%, reaching a new high since April 2023, in line with market expectations. Excluding the more volatile food and energy components, the core PPI for April increased by 2.4% year-on-year, slightly higher than the expected 2.3%, and consistent with the previous value; the core PPI on a monthly basis increased from 0.2% in March to 0.5%, surpassing the expected 0.2%.

The increase in April PPI was mainly driven by a surge in service costs, with energy prices being the second important factor, while food prices actually decreased that month.

Analysts believe that the latest U.S. PPI data far exceeded expectations, and sticky inflation seems to have become more stubborn. However, due to the downward revision of the March data, the actual impact of this report may not be as shocking as it initially appears. From the PPI data perspective, it has had a mixed impact on the Fed's favorite inflation indicators to be released later this month.

Regarding the above PPI data, Powell stated that the U.S. PPI data actually sends out quite a confusing signal. I wouldn't call the PPI data overheated, but it is somewhat "mixed feelings." In my view, the Fed's FOMC does not know whether inflation will be sticky. On Wednesday, the US Department of Labor will release the more significant Consumer Price Index for April.

Monetary Policy is Restrictive

Powell believes that the current Fed policy is restrictive in many ways, enough to slow down demand, but also points out that time will tell whether the policy is sufficiently restrictive to bring inflation back to the Fed's 2% target.

Regarding the impact of Fed policy on the American public, Powell noted that overall, Fed monetary policy is affecting consumer spending. Survey results indicate that people do not see it as a good time to buy durable goods. While Americans have accessed housing financing at low mortgage rates, they are not doing so now.

Powell reiterated that the Fed's next move is unlikely to be a rate hike, and it is more likely that the Fed will keep the policy rate at its current level. "I've said that based on the data we have, I think our next move is unlikely to be a rate hike."

US Economy, Labor Market, and Others

Powell described the US labor market as "very strong," showing signs of gradual cooling and rebalancing, partly due to increased immigration leading to an increase in labor supply. However, many industries still face labor shortages. The labor market remains as tight as it was before the COVID-19 pandemic in 2019.

Regarding the US economy, Powell stated that recent performance has been very good. Household finances are in good shape, and leverage is not excessively high. The US continues to benefit from strong early responses to the COVID-19 pandemic.

Powell pointed out that the unsustainability of US fiscal policy is undisputed. The federal government must address the massive deficit issue sooner rather than later. Trade policy is a hot political issue, but it is not the Fed's responsibility.

Powell talked about the banking industry. He stated that overall, the US banking system is in good shape. Large banks are performing well, with good capital. In the US, lending in the non-bank sector is growing rapidly. The Fed's responsibility is to carefully monitor lending in the non-bank sector. The interconnectedness between banks and the non-bank sector is very close and continuously strengthening. In terms of financial stability, the net losses in the non-bank sector are not prominent.

Powell also mentioned that the Fed has the firepower it needs to defend its independence. Support for the Fed on Capitol Hill is very strong.

"New Fed News" Commentary

Renowned financial journalist Nick Timiraos, known as the "New Fed News," wrote that Fed Chair Powell confirmed the Fed's plan to keep rates at their highest level in over twenty years, waiting for evidence that inflation will resume its slowdown. Powell remains cautious on inflation and rates.

Timiraos stated that for Fed officials, the risks are high. After conducting the most aggressive series of rate hikes in forty years over the past two years, they are trying to balance two risks. One risk is that they ease too early, leading to sustained inflation above the 2% target level; the other risk is that they wait until the labor market collapses under the pressure of higher rates The Federal Reserve is cautious about cutting interest rates, showing increasing divergence from other major central banks. On Tuesday, Powell appeared on stage with Klaas Knot, President of the Dutch Central Bank. Knot suggested that the European Central Bank is preparing to cut interest rates at its meeting next month.

Market Reaction

During the U.S. trading session on Tuesday, the market's response to Powell's speech was relatively muted:

• The yield spread on the two-year U.S. Treasury note narrowed, rebounding from the day's low by nearly 3 basis points to 4.84%.
• Spot gold maintained a gain of less than 0.8%, temporarily trading above $2350 per ounce during Powell's speech.
• The S&P 500 index rose by over 0.2% during Powell's speech, then turned lower. The Dow rose by about 0.3% at one point, then turned lower. The Nasdaq rose by over 0.1%. Tesla rose by about 2%, while Apple remained roughly flat