Fed forecasts just one rate cuts this year as Powell says inflation fight not over

The chairman of the US Federal Reserve has warned the battle to tame inflation is not over as policymakers signalled the central bank would cut rates only once this year.

Jerome Powell said inflation was “still too high” after Fed rate setters voted unanimously on Wednesday to keep interest rates at a 23-year high of between 5.25pc to 5.5pc.

The decision to hold rates came just hours after official data showed US inflation fell faster than expected in May, sending stocks to a fresh record and prompting investors to ramp up bets on a September reduction in borrowing costs.

Mr Powell said “considerable progress” had been made to bring down price pressures. However, he said recent data had “not given us confidence” to cut rates yet.

Figures published by the US Bureau of Labor Statistics earlier in the day showed inflation fell to 3.3pc in May, compared with 3.4pc in April. Economists had expected the rate to remain unchanged.

Mr Powell welcomed May’s faster drop but said policymakers were looking for more consistent signs that the economy was cooling.

“We see today’s report as progress and building confidence, but we don’t see ourselves as having the confidence that would warrant beginning to loosen policy at this time,” he told reporters.

“It’s probably going to take longer to get the confidence we need to loosen policy.”

The Fed’s latest move comes a day after strong UK wage data all but ruled out an interest rate cut by the Bank of England next week, though British policymakers are under pressure to start reducing borrowing costs to support the sluggish economy.

US stocks had risen to fresh record highs ahead of the Fed decision and markets held on to most of their earlier gains despite Mr Powell’s caution. The S&P 500 was trading up more than 1pc as the Fed chief was speaking.

Britain’s blue chip index and the midcap FTSE 250 closed up around 1pc, while French stocks also ended the day higher following two days of decline sparked by Emmanuel Macron’s decision to call a snap election.

Fresh Fed forecasts showed policymakers revised up their outlook for inflation over the next two years. While the Fed left its growth forecasts unchanged for the next three years, policymakers now expect inflation to fall more slowly towards its 2pc target.

At the same time, they predicted more rate cuts next year, with three now expected in 2025 rather than one as was previously forecast.

Policymakers are attempting to steer inflation back towards target while trying to prevent the economy from slipping into recession.

Inflation was sent lower in April by a big drop in fuel prices. The closely-watched core inflation reading, which strips out volatile food and energy prices, also fell from 3.6pc to 3.4pc, below analyst estimates.

Daniel Mulholland, senior managing director at Crews & Associates, said: “This is a very weak report. The Fed is fully in play for a September cut now.”

Paul Ashworth, chief North America economist at Capital Economics, added: “We still need several more months of this, but the fundamentals are encouraging.”

The pound jumped 0.9pc against the dollar following the figures, which also sent the cost of borrowing downwards.

Money markets are now fully pricing in a quarter of a percentage point reduction in US interest rates by November.

The Fed’s decision to keep rates on hold follows months of data highlighting stubborn price pressures in the world’s biggest economy.

America added 272,000 jobs in May, far more than expected, even as unemployment ticked up slightly to 4pc.

Mr Powell said the jobs market was now in “better balance” after clear signs that it was “overheated” two years ago.

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