WASHINGTON – US inflation is “still too high” despite a recent slowdown, Federal Reserve chairman Jerome Powell said on Thursday, leaving the door open for a new interest rate hike.

Additional evidence of “persistently above-trend growth”, or a reversal of the recent decline in job openings and softening of wage growth, could cause the Fed to reconsider its current rate pause, he told a conference in New York.

If the US economy develops in this way, it “could put further progress on inflation at risk and could warrant further tightening of monetary policy”, he said in a speech that was briefly disrupted by climate change protesters.

The Fed recently slowed its aggressive campaign of monetary tightening, which lifted its benchmark lending rate to a 22-year high, as it looks to slow down inflation without pushing the US economy into recession.

Headline inflation, as measured by the Fed’s favoured gauge, has more than halved since peaking in June 2022, but is still stuck above its long-term target of 2 per cent.

“Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably towards our goal,” Mr Powell said.

“We cannot yet know how long these lower readings will persist, or where inflation will settle over the coming quarters,” he said, adding that the Fed would proceed carefully at future interest rate meetings.

Monetary policy is ‘restrictive’

Mr Powell said the Fed’s current policy stance is “restrictive”, suggesting that monetary policy is working to put “downward pressure on economic activity and inflation”.

But he warned that “a range of uncertainties, both old and new” is complicating monetary policy.

“Doing too little could allow above-target inflation to become entrenched,” he said. “Doing too much could also do unnecessary harm to the economy.”

Recent data points to the continued strength of the US economy supported by resilient consumer spending, while the tight labour market is showing some signs of softening.

The Fed’s upcoming decisions will be “based on the totality of the incoming data, the evolving outlook and the balance of risks”, he said, echoing previous comments.

Futures traders currently assign a probability of over 95 per cent that the Fed will announce it will hold interest rates steady on Nov 1, following its next meeting, according to data from CME Group.

Geopolitical tensions threaten economy

In an unusual move, Mr Powell also addressed the ongoing conflict between Israel and Hamas in Gaza. “Geopolitical tensions are highly elevated and pose important risks to global economic activity... I found the attack on Israel horrifying, as is the prospect for more loss of innocent lives,” he said.

The Fed’s role is to monitor what economic implications these developments could have, he added.

Analysts have voiced concerns that the conflict could spread into a broader regional conflict in the crude-rich Middle East, with implications for oil production. AFP