Jerome Powell says 'long road ahead' as disinflation begins

Fed Reserve chairman says certain sectors of US economy are showing signs of disinflation

Federal Reserve chairman Jerome Powell. AFP
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Federal Reserve chairman Jerome Powell repeated his claim that the US economy's "disinflation" process has begun, although he cautioned that the central bank must continue with its tightening of monetary policy.

“But it has a long way to go. These are the very early stages of disinflation," Mr Powell told the Economic Club in Washington, pointing to the goods sector.

In what could be seen as the undercard to US President Joe Biden's State of the Union address on Tuesday, Mr Powell's remarks were his first since a report last week showed stunning job gains for January.

The Fed has received some welcome data after raising interest rates eight times since March 2022, but the labour market remains a persistent obstacle.

The economy added 517,000 jobs in January as the unemployment rate hit a 53-year low of 3.4 per cent.

Mr Powell said the latest jobs report was surprisingly strong.

"It kind of shows you why we think that this will be a process that takes a significant period of time," he said.

Inflation has shown signs of moderation after climbing to as high as 9.1 per cent last year.

Mr Powell believes it will not be until next year when inflation returns closer to the Fed's long-term 2 per cent goal.

"We expect 2023 to be a year of significant decline in inflation," he said.

“My guess is it will take certainly into not just this year, but next year to get down close to 2 per cent."

After the Fed raised interest rates by 25 basis points last week, investors had hoped Mr Powell would clarify how much longer the central bank will retain its monetary tightening policy.

Markets negatively reacted to Mr Powell's comments after wavering earlier in the day. The Dow Jones Industrial Average was down 197 points, or 0.58 per cent, about 1.20pm EST.

The S&P 500 and Nasdaq Composite slipped 0.3 per cent and 0.09 per cent.

Will interest rates pass 5.1%?

Interest rates now stand in the range between 4.50 to 4.75 per cent, after being near zero last March, as part of the Fed's battle to tamp down inflation, which stands at 6.5 per cent.

The Fed's long-term goal is to bring inflation down to 2 per cent.

Its median estimate in December forecast interest rates to reach 5.1 per cent by the end of the year, although recent jobs data could compel them to increase that estimate.

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said the January jobs report showed more interest-rate increases would be necessary.

“Right now I’m still at around 5.4 per cent,” Mr Kashkari told CNBC.

“I too was surprised by the big jobs number. It tells me that so far we’re not seeing much of an imprint of our tightening to date on the labour market.”

Mr Powell and his colleagues have been trying to bring on a soft landing, which involves slowing down the economy without a recession.

The Federal Open Market Committee will update its end-of-year forecasts when it next meets in March.

Updated: February 07, 2023, 7:23 PM