Fed’s Powell Lauds Progress on Inflation, Warns the Process of Disinflation ‘Is Just Beginning’


The comments came in a speech to the Economic Club of Washington.

Federal Reserve Chairman Jerome Powell said on Tuesday the “disinflation process has begun” but that higher interest rates would be around for a while.

The message, delivered in a lunchtime chat with the Economic Club of Washington, reiterated statements he made a week ago after the central bank downshifted its level of interest rate hikes to 25 basis points following a series of 75 and 50 basis point increases in 2022.

Powell made a distinction between the rising prices of goods such as furniture and appliances, where inflation has eased considerably, and the services sector. Within services, he noted there were two components the Fed was watching – housing services, mostly rents, and overall services outside of housing.

“We’re not seeing it (disinflation) yet in housing,” Powell said, “but we expect to see that this year.”

But, he added, the Fed has yet to see disinflation in the broader services sector.

“We’re just at the beginning of this process,” Powell said of the fight against inflation that reached levels not seen in four decades last summer when consumer prices rose at an annualized rate of 9.1%.

He traced the recent cycle of inflation to the origins of the coronavirus when people were unable to shop in person and instead began buying expensive goods online to now, where consumers are shifting their buying habits to services and “experiences” rather than goods.

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Since the Fed raised interest rates a week ago and Powell gave a combination of hawkish and dovish statements on rates and the process of inflation, markets have both rallied and sold off as traders assess the likelihood the Fed will begin ceasing rate hikes or potentially cutting rates. The debate received new fuel with Friday’s announcement the economy created 517,000 jobs in January, a number that was way beyond estimates.

Now, the market appears to be swinging from fearing a recession to expecting a “soft landing” to no landing but continued, albeit slower growth of the economy.

“Today’s comments do nothing to undermine the recent strength in the market,” said David Russell, vice president of market intelligence at TradeStation. “They also seem to keep us on track for another 25 basis points in March, with possibly no more increases after that. It’s a potential Goldilocks environment for the bulls and a very tough spot for the bears.”

Stocks rallied as Powell began speaking, with the Dow Jones Industrial Average up more than 100 points but cooled a bit as he continued speaking.

“We expect significant progress on inflation this year and again it’s our job to produce it,” Powell said. However, he also said that, “We’re going to need to keep rates at a restrictive rate for quite some time.”

Separately, mutual fund giant Vanguard released its investor expectations survey Tuesday showing increased optimism about the markets and the economy going forward.

The survey, taken in December, found investors expecting average growth in gross domestic product growing over the next three years, rising from 2.7% to 3%, with fewer than 20% saying economic growth over the next three years would be below its historical annual average of 1.8% per year.

“Investors are still showing differentiated views on the market and the economy,” said Xiao Xu, an analyst in the Vanguard Investment Strategy Group and research lead for the survey. “That may reflect the disconnect between the year-long market decline in 2022 and the relatively strong economic performance during the same period. The recent easing in inflation might also have added to their more positive take on the economy.”