by Balazs Koranyi and Howard Schneider

SINTRA, PORTUGAL (Reuters) – The U.S. central bank needs more data before cutting interest rates to ensure that recent inflation data, which show a slowdown, accurately reflect what is happening with underlying price pressures, Chairman Jerome Powell said on Tuesday.

“We simply want to understand that the levels we are seeing correspond to the reality of underlying inflation,” he said at a monetary policy conference in Portugal hosted by the European Central Bank (ECB).

“We want to be more confident and, frankly, because the American economy is strong, we have the opportunity to take our time,” he added.

Data released last week in the United States showed that the PCE price index, the Federal Reserve’s preferred measure of inflation, slowed to 2.6 percent from a year earlier, in line with forecasts from economists polled by Reuters, after rising 2.7 percent in April.

This figure remains, however, almost half a point higher than the Fed’s 2% target.

In its June 12 policy statement, the Fed had deemed the personal consumption expenditure price index to be “elevated.”

The most recent data on inflation and overall economic activity, however, suggest that price pressures may ease further.

Investors are anticipating a first 25 basis point cut in the US central bank’s federal funds rate at its September 17-18 meeting.

Whether rates are cut at that time or later will depend largely on upcoming employment and inflation reports, with the June labor market report due on Friday and the June consumer price index (CPI) due on July 11.

While the timing of the first rate cut matters little for the overall economic impact the Fed seeks, bank officials say they are mindful of the risk of maintaining tight monetary policy for too long and damaging the labor market if the economy slows too quickly. They also say they are sensitive to the signal they will send when they cut rates.

Fed officials want to make sure that the first cut in borrowing costs begins a full cycle of monetary easing that gradually brings rates back to a level where the bank believes they neither encourage nor discourage businesses and households to invest and spend.

For many officials, this is an argument in favor of patience and a longer wait before the first rate cut.

(Reporting by Balazs Koranyi; with contributions from Howard Schneider; Claude Chendjou, edited by Blandine Hénault)

Copyright © 2024 Thomson Reuters