The US still has a “long way to go” in the battle to get inflation back to 2pc, Federal Reserve chairman Jay Powell has warned.
The central bank chief left the door open for future interest rate rises even as the Fed voted to hold borrowing costs unchanged for the second meeting in a row. Rates were left at a 22-year high of 5.25pc to 5.50pc.
Mr Powell told reporters in Washington: “Inflation has moderated since the middle of last year and readings over the summer were quite favourable.”
But he added: “A few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal. The process of getting inflation sustainably down to 2pc has a long way to go.”
Mr Powell said the central bank was monitoring the economic implications of the Israel-Hamas war but said it was not clear that it was “on track to have significant economic effects.”
He said: “Really, the question there is does the war spread more widely and does it start to do things like affect oil prices in particular since this is the Middle East we’re talking about.”
Rate-setters at the Bank of England are widely expected to follow their colleagues in the US and leave interest rates unchanged at 5.25pc on Thursday.
The European Central Bank last week also held borrowing costs where they were for the first time in more than a year, fueling hopes that the global cycle of interest rate rises is coming to an end.
The Bank of England is expected to stand pat amid mounting signs that the British economy is starting to buckle under pressure from 15-year-high interest rates.
A closely watched survey of manufacturers released on Wednesday showed the sector is suffering the longest sustained fall in production since the financial crisis, with factories mired in job cuts and uncertainty.
However, inflation in the UK remains stubbornly high at 6.7pc in September.
This is significantly higher than in the Eurozone where consumer price rises slowed to 2.9pc in October.
US inflation peaked at 9.1pc in June last year, the highest level in four decades. It fell back to 3pc in June 2023 but has since edged up slightly to 3.7pc.
Mr Powell said progress fighting inflation would be “lumpy”.
Some City economists have said Threadneedle Street will likely tolerate inflation staying above its 2pc target for longer than other central banks if the trade-offs are deemed too high. Economic growth in the UK is sluggish and unemployment is rising.
By contrast, the US has proved remarkably resilient in the face of higher borrowing costs.
The Fed has raised borrowing costs 11 times in its most aggressive round of tightening since the 1980s. However, the US economy grew by 4.9pc in the three months ending in September.
Figures released on Wednesday also showed job openings rising against expectations in September.
Mr Powell said: “Reducing inflation is likely to require a period of below potential growth and some softening of labour market conditions.”
He admitted the Fed remained unconvinced that a recession would follow, despite having previously predicted one.
Despite the hawkish tone, the Fed’s actions and Mr Powell’s words were widely interpreted by markets as a sign that borrowing costs have peaked. Traders priced in only a smaller chance of a rate increase at the next meeting in December.
The S&P 500 stock market index, which tracks the largest listed US companies, rose by more than 1pc as Mr Powell was speaking.
Mr Powell said the turmoil in the bond market, which recently sent 10-year treasury yields to a 16-year high, could help put a lid on inflation if it persists.
Salman Ahmed, an investment strategist at Fidelity International, said: “There was a hawkish bias in the commentary but it’s also clear that the FOMC currently feels comfortable with the state of financial conditions, which have tightened since the last meeting. This means the bar for additional hikes remains high, which is what the markets seem to be focused on.”