US not suffering from ‘stagflation’, says Fed chairman Jerome Powell

The US is not suffering from “stagflation” and is growing well despite stubborn inflation, Federal Reserve chairman Jerome Powell has said.

Mr Powell on Wednesday night dismissed suggestions that the US was close to an economic trap of stagnant growth and rampant inflation, saying the economy was among the best in the world and the rate of price rises was on track to fall to the Fed’s 2pc target.

The central bank chief added that it was “unlikely” the Fed would need to raise interest rates any higher to combat inflation, in comments that raised hopes borrowing costs have peaked and will soon be on the way down.

Stock markets rallied after Mr Powell’s statements, which took investors by surprise. Most had expected him to signal that the Fed was still willing to put up borrowing costs if necessary after a recent run of strong economic data.

The S&P 500, the Dow and the tech-heavy Nasdaq indexes all jumped by more than 1pc on Wall Street following Mr Powell’s press conference comments.

Josh Jamner, a strategist at ClearBridge Investments in New York, said: “Many investors were positioned for, and fearful of, a more hawkish bent after a string of hot inflation prints so far this year.”

Mr Powell’s rosier-than-expected assessment of the US economy will raise hopes that interest rates will soon begin falling around the world. The Bank of England’s Monetary Policy Committee meets next week, with division on the nine-person board over when to lower rates.

The Bank’s panel of rate-setters is expected to hold borrowing costs at 5.25pc, even as many analysts believe inflation will have fallen below 2pc in April.

The Fed on Wednesday held US interest rates at a 23-year-high range of 5.25pc to 5.5pc.

Mr Powell said it was still too early to declare victory against inflation after “a lack of further progress”. US inflation rose for the second month in a row in March to reach 3.5pc and Mr Powell said it was “likely to take longer for us to gain confidence that we are on a sustainable path” towards 2pc inflation.

He added that other central banks around the world were likely to cut interest rates before the US, given weaker growth rates elsewhere, but said this was unlikely to create economic problems as it has in the past.

Asked about concerns that the US economy was at risk of “stagflation”, the Fed chief told reporters in Washington: “Right now we have 3pc growth, which is pretty solid I would say by any measure, and we have inflation running under 3pc. I do not see the ‘stag’ or the ‘flation’.”

Market commentators last week raised fears of “stagflation” following weaker-than-expected growth in the first three months of the year coupled with surprisingly strong core inflation.  

However, new figures on Wednesday showed that job openings fell to a three-year low in March, a sign that inflationary pressures from a tight labour market are easing.

Oil prices are also dropping rapidly, which should ease pressure on fuel prices around the world. Brent crude, the international benchmark, has fallen 6.6pc to $83.51 a barrel over the last three days, amid hopes of a ceasefire in the Israel-Gaza conflict.

While the US economy is performing well, fresh data on Wednesday raised concerns about the strength of Britain’s economic recovery from the recession suffered at the end of last year.

Manufacturing businesses reported a fall in activity in April, according to S&P Global’s influential purchasing managers’ index survey.

Output had risen in March for the first time in more than a year but the latest figures suggest factories are struggling to create momentum.

Companies are also facing the sharpest rise in costs since February of 2023, the survey found, and they are attempting to pass this on to customers, with prices charged to clients also accelerating.

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