Powell says Fed needs more evidence of falling inflation before cutting rates

By Balazs Koranyi and Howard Schneider

SINTRA, Portugal (Reuters) -The U.S. central bank still needs more data before cutting rates of interest to be certain that recent weaker inflation readings give a real picture of what is going on to underlying price pressures, Federal Reserve Chair Jerome Powell said on Tuesday.

Data for May showed the Fed’s preferred measure of inflation didn’t increase in any respect that month, while the 12-month rate of price increases has ebbed to 2.6%, still above the central bank’s 2% goal but on the best way down.

“We just want to know that the degrees that we’re seeing are a real reading on what is definitely happening with underlying inflation,” Powell said at a monetary policy conference in Portugal sponsored by the European Central Bank. “We wish to be more confident, and albeit since the U.S. economy is powerful … now we have the flexibility to take our time.”

Still, Powell acknowledged the central bank has entered a sensitive phase in its policy deliberations where the risks to each the Fed’s inflation and employment goals “have come back much closer to balance.”

Specifically, some closely watched measures of the job market suggest the U.S. economy could also be approaching a degree where further progress on inflation will involve the type of tradeoffs with rising unemployment that the Fed has to date avoided.

“You may’t know that with precision,” Powell said, “however it is known that now we have two-sided risks.”

“Given the strength we see within the economy we are able to approach the query fastidiously,” Powell said, while also noting that policymakers don’t need to maintain policy too tight for too long and “lose the expansion.”

RATE-CUT TIMETABLE

The Fed has kept its benchmark policy rate of interest regular within the 5.25%-5.5% range since last July, but officials are debating when to ease monetary policy as inflation edges back to the central bank’s 2% goal.

Inflation remains to be greater than half a percentage point above that focus on, in line with the Fed’s preferred personal consumption expenditures price index, and was described as “elevated” within the central bank’s June 12 policy statement.

Probably the most recent data on inflation and overall economic activity, nevertheless, suggest that price pressures could also be easing further, and investors anticipate an initial quarter-percentage-point rate reduction on the Fed’s September 17-18 meeting.

Whether the Fed finally ends up on that timetable or a more delayed one will hinge on coming employment and inflation reports, including the discharge on Friday of the monthly employment report for June and the July 11 release of the patron price index for June.

While the timing of an initial rate cut may matter little to the larger economic outcomes the Fed is looking for, policymakers are attuned to the danger of keeping tight monetary policy in place too long – and putting the present low unemployment rate in danger if the economy slows an excessive amount of or too fast – and are also sensitive to the signal they may send by cutting rates.

They wish to make certain specifically that the primary reduction in borrowing costs becomes the beginning of a full monetary easing cycle that brings rates steadily right down to a level where the Fed feels it’s neither encouraging nor discouraging businesses and households to take a position and spend.

For a lot of officials that has been an argument in favor of being patient and waiting longer to make the primary rate cut.

(Reporting by Balazs Koranyi; additional reporting by Howard Schneider; editing by Paul Simao)

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