Stocks rise as Federal Reserve chairman Jerome Powell welcomes US inflation progress

America's central bank can take time in cutting interest rates, chairman says

Federal Reserve Chairman Jerome Powell still expressed caution in adjusting the central bank's restrictive stance. AFP

Wall Street indexes rallied on Tuesday after Federal Reserve Chair Jerome Powell noted progress made in taming US inflation, although he still wants more confidence before the central bank begins cutting interest rates.

After a bumpy first quarter, Mr Powell said recent economic figures “suggest we are getting back on a disinflationary path”.

A key metric closely monitored by the Fed released last week showed headline inflation slowed to 2.60 per cent last month, down from 2.70 per cent in April. Core inflation, which excludes food and energy, slowed from 2.80 per cent to 2.60 per cent.

“We've made a lot of progress,” Mr Powell said during a panel on monetary policy in Portugal.

"We've made quite a bit of progress inflation back down to our target. While the labour market has remained strong and growth has continued, we want that process to continue," he said.

The S&P 500 and Nasdaq both hit record-highs following Mr Powell's remarks, with the S&P closing above 5,500 for the first time. The Dow Jones Industrial average rose about 0.4 per cent.

Mr Powell said he does not foresee US inflation climbing back down to 2 per cent until 2026, but "the main thing is we're making real progress".

But the Fed chair still expressed caution in adjusting the central bank's restrictive stance.

“We want to be more confident that inflation is moving sustainably down towards 2 per cent before we start the process … of loosening policy.

The US central bank has kept its benchmark target range at 5.25 to 5.50 per cent since July 2023 after aggressively raising rates in response to a global inflation surge in 2022.

By raising interest rates, the Fed has tried to engineer a so-called soft landing in which it tames inflation without driving the economy into a recession or leading to high levels of unemployment.

“We're well aware that if we go too soon, that we could undo the good work we've done to bring down and if we go too late, we could unnecessarily undermine … the recovery,” Mr Powell said.

Unlike other central banks, the Fed holds a dual mandate to promote maximum employment in addition to price stability. A closely watched unemployment report released by the Labour Department on Friday was expected to offer more clues as to how much the US labour market is cooling.

“You can't know that with precision but it's very much understood by us that we have two-sided risks,” Mr Powell said.

Most Fed officials have indicated in recent weeks they are satisfied with the Fed's current stance and believe they can afford to be patient when cutting rates. According to their latest projections, Fed officials project one rate cut this year before issuing more in 2025.

The Fed chief also said the stalled progress in taming inflation during the first quarter this year vindicated the Fed's cautious approach to rate cuts.

“People were saying, 'You need to declare victory. This is over.' And then we had a quarter of inflation,” Mr Powell said.

“We just want to understand that the levels that we’re seeing are a true reading of underlying inflation.

“We want to be more confident and frankly because the US economy is strong … we have the ability to take our time.”

Markets expect the Fed to begin cutting rates at the conclusion of its meeting in September.