Central banks keep markets guessing on path of interest rates

Investors looking for clear guidance on the path of interest rates received few firm commitments from top central bankers on Tuesday despite the progress seen on inflation.

At an event in Portugal, Jerome Powell, chair of the Fed, and Christine Lagarde, president of the European Central Bank (ECB), said they were content to watch the incoming data before committing to any decision on interest rates.

Powell said that although the US has made “quite a bit of progress” on returning inflation to two per cent, he still wanted to be “more confident” before lowering interest rates.

“We just want to understand that the levels that we’re seeing are a true reading on what is actually happening with underlying inflation. We want to be more confident, and frankly because the US economy is strong … we have the ability to take our time,” he said.

Figures out last week showed that the Fed’s preferred gauge of inflation increased at its slowest pace in six months in May, with prices rising just 0.1 per cent in the month. The consumer price index (CPI) meanwhile recorded no growth in May. This meant the annual rate of inflation eased to 3.3 per cent.

With inflation slowly moving towards the target, investors think that there is a good chance that the Fed will start cutting interest rates in September.

Powell acknowledged that the risks to the Fed’s inflation and unemployment mandates “have come back much closer to balance,” but he declined to comment on the chances of a September cut.

“I am not going to be landing on any specific dates,” he said.

Similarly Lagarde said “we are very advanced in the disinflationary path,” before noting the “uncertainties and question marks about the future”.

When asked if she was preparing the markets for a pause when the ECB meets in two weeks time, she said “I’m not setting up anything for anyone”.

The ECB cut interest rates for the first time in five years last month but did not give any forward guidance on what it would do over the months ahead.

Although inflation is nearing the target in the currency area, there are still signs of persistent price pressures. Figures out this morning showed that inflation in the eurozone eased to 2.5 per cent, in line with expectations, while services inflation remained at 4.1 per cent.

“We still believe it’s likely to be a bumpy road until the end of 2024,” Lagarde said.