UPDATE 2 - US Fed chair says disinflationary trend resuming, more confidence needed to start monetary loosening

UPDATES WITH CHRISTINE LAGARDE'S ADDITIONAL COMMENTS

By Ovunc Kutlu

ISTANBUL (AA) - The Federal Reserve Chair Jerome Powell said Tuesday that inflation in the US shows signs of resuming a disinflationary trend, but the Fed needs more confidence to start monetary loosening.

Powell said the American economy saw solid growth in the first half, while labor market remains strong, and inflation, after pausing in the first quarter, now shows signs of resuming a disinflationary trend.

"We made quite a bit of process of bringing back inflation down to our target, while the labor market has remained strong, growth has continued. We want that process to continue," he said at the European Central Bank (ECB) Forum on Central Banking 2024 held in Sintra, Portugal.

Powell noted that the last two inflation data showed the Fed is getting back on a disinflationary path, and added "We want to be more confident that inflation is moving down to 2% before we start our loosening policy."

When asked about how much more confidence, Powell said "Because the US economy and the labor market are strong, we have the ability to take our time and get this right."

The Fed chair, however, did not provide any answer as to whether the US central bank would start lowering its benchmark interest rate in September.

"If we go too soon, we can undo the good work we've done in bringing down inflation, and if we go too late we can unnecessarily undermine the (economic) recovery and expansion," he explained.

ECB President Christine Lagarde said the central bank 'very advanced' at disinflationary path, and it sees slow economic recovery.

"We still believe that it is going to be a bumpy road until the end of 2024, but we still have (inflation) target (of 2%) at the second half of 2025," she said. "Services (inflation) hasn't budged ... Obviously, we are very attentive to the components and what is behind services."

"This is caused by permeant changes, and also a factor of a lag effect of other components which are finding their way more slowly and gradually into services," she added. "We do have the services number that has gone slightly up in the recent months, which is now staying at 4.1%."

Lagarde said the ECB does not need the services inflation below 2%, and noted that manufacturing goods inflation is below 2%.

"At the end of the day, there's going to be a balance between goods and services, and the weight of those within the index. But, we have to look really what is behind it," and listed those as real wages, renegotiation of wages in the EU, declining profits, and increasing cost of wages.

Powell said services inflation in the US is "stickier" and it is tied to wages, but the US labor market is more balanced now, compared to last year.

He said the unemployment rate, wage increases, inflation and productivity are moving to a more sustainable level.

"The labor market is cooling off, it does not look like heating up or presenting a big problem for inflation," he added.

The Fed chair said non-housing services are "a mixed bag," and some of the high prices seen in those are "catch-up inflation" from inflationary pressures from earlier, such as insurance and rent increases.

"We don't see ourselves getting back to 2% inflation this year, or next year, maybe late next year and the year after," he said. "The main thing is we're making real progress."

Powell noted that the Fed still sees its monetary policy as "restrictive" despite the US economy managed to avoid a recession last year. "Demand for labor has come down in the form of job openings, and there is a slightly softening in employment in the form of wages," he said.

Lagarde said the ECB takes into account the spillover effect of other central banks' monetary policy decisions.

She added that the ECB's monetary policy is also determined by the European economy, macroeconomic data, and multiple factors on economy.

Lagarde said there is a framework within which EU members have to operate, control the direction of their debt and make sure it is sustainable, and keep their deficit on watch.

The ECB chief said she hopes that in addition to operating within the European fiscal framework, countries need to look at the structural changes that they have to continue and improve.

"We're very concerned about the fiscal rules that have to be respected within the European Union and the structural reforms that will be conducive to productivity improvement, because that's the only way for Europe to remain strong and thrive in changing circumstances and transformations," she added.

About tariffs, Lagarde said the number of protective measures occasionally do not comply with the rules of World Trade Organization (WTO), adding that the level of disputes brought before the WTO are "not stable," compared to the past.

She said the WTO is not in a position to resolve tariff disputes, because it is not equipped with the dispute resolution mechanism.

"We had more than 3,000 trade protective measures decided in the last two years," which is around five-times the average in the past, she said.

"That is a concern because trade has been fueling growth and Europe is a large open economy," Lagarde said. "Trade is conducive to innovation, innovation is necessary for productivity. Combination of reduced trade on growth and the impact of trade on the capacity to innovate and improve productivity is a one that we have to address forcefully."