Recent readings bolster Fed’s inflation confidence, says Powell

Federal Reserve Chair Jerome Powell shared a cautiously optimistic outlook on inflation during his recent address at the Economic Club of Washington, suggesting that recent data points to a sustainable return to the Fed's 2 percent target.

His remarks, reported by multiple news outlets on Monday afternoon, mark a significant shift in tone and may hint at future interest rate cuts.

"In the second quarter, actually, we did make some more progress on taming inflation," Powell said in coverage by Reuters. "We've had three better readings, and if you average them, that's a pretty good place."

The annualized rate of consumer price increases, excluding volatile food and energy components, stood at 2.1 percent during the three-month period from April to June. That rate, while slightly higher than the Fed's preferred PCE price index, indicates a positive trend as economists anticipate further easing when June’s PCE data is released next week.

Powell reiterated the Fed's cautious stance of refraining from loosening policy until it could safely say inflation was easing sustainably to the 2 percent mark.

"What we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was returning sustainably to 2 percent," he elaborated.

The past three reads on inflation since April have shown a general cooling of inflation, giving more leeway for the Fed to consider cuts.

Last week’s Labor Department report highlighted a notable decline in the CPI for June, marking the first month-to-month drop in four years. This was followed by favorable wholesale inflation data, leading economists to estimate that the PCE gauge will reflect further alignment with the Fed's inflation target.

Powell’s analysis of the current economic landscape indicates a balance conducive to managing inflation while maintaining employment levels.

"There is no slack in the labor market … Essentially we're at equilibrium now," he said.

With an unemployment rate of 4.1 percent, the labor market is just a tenth of a percentage point under Fed officials’ median view of what an economy at full employment should look like with 2 percent inflation, according to Reuters.

"Look where inflation is. Inflation is at 2.5 percent," he added, noting the unusual scenario of inflation cooling without a corresponding spike in unemployment.

During his conversation with David Rubenstein, chairman of the Economic Club of Washington, Powell underscored that the Fed would not delay rate cuts until inflation hits the 2 percent target, due to the long and variable lags of policy impacts.

"The implication of that is that if you wait until inflation gets all the way down to 2 percent, you’ve probably waited too long," Powell explained in separate reporting by CNBC.

Powell also shrugged off concerns of a severe economic downturn, saying a “hard landing” for the US economy “is not a likely scenario."

Bets of a Fed rate cut at the upcoming July meeting have all but vanished, but traders are still holding out hope for a dovish turn in September, with potential follow-up cuts in November in December.