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"The labor market remains very strong" as the unemployment rate remains under 4% for the longest period in more than half a century, Federal Reserve Chair Jerome Powell said on Tuesday. Even with this strength the labor market has been moving into better balance, he said.
However, recent data demonstrates a lack of progress on inflation heading toward the Fed's 2% target. That means it will likely take longer for the central bank to gain confidence that inflation is headed lower, he said at the Washington Forum on the Canadian Economy. As such, it's appropriate to give the Fed's restrictive policy more time to work, he said.
Interest rate traders are taking that delay to heart. The probability that the Federal Open Market Committee will keep rates at 5.25%-5.50% jumped to 84.8% from 78.7% on Monday, according to the CME FedWatch tool. As well, the probability of extending the pause to the July meeting increased to 58.5% from 51.1% a day earlier. (Added at 2:06 PM ET.)
Bank of Canada Governor Tiff Macklem noted that Canada's central bank doesn't necessarily follow the Fed's lead. "We don't need to do what the Fed does. We can do what Canada needs."
He noted that Canadian inflation trends appear to be heading in the right direction. Headline inflation came in close to 3%, as expected, but measures of core inflation ticked down, indicating inflation trends are heading in the right direction, he said at the Washington Forum on the Canadian Economy.
Updated at 1:44 PM ET: Both central bank heads discussed the importance of communication among policymakers worldwide, especially when a crisis strikes. Discussing options with other central bankers "is hugely important in a crisis," Macklem said.
1:46 PM ET: Powell said the lesson the Fed learned during the banking stresses in spring 2023 was that the Fed wasn't forceful enough and fast enough in supervising banks like Silicon Valley Bank once it identified problems.
1:48 PM ET: The Bank of Canada spends a lot of time looking at what's going on in the U.S. and the implications for Canada, Macklem said.
1:50 PM ET: "Each central bank serves a domestic mandate," but in the case of the U.S., the Fed is aware of the effect its policies have on other countries and the potential to rebound back to the U.S. "We do realize we have a responsibility to be predictable and transparent," Powell said.
1:53 PM ET: In discussing post-pandemic inflation, "this is not the standard case of overheated demand," he noted. Constrained supply and elevated demand contributed to the episode of rising inflation in 2021 and 2022.
1:56 PM ET: Monetary policy has more traction in Canada, due to the differences in mortgages, compared with the U.S.'s financial system, Macklem said. The average mortgage in Canada is for five years vs. the U.S.'s average 30-year mortgage.
2:03 PM ET: Event concludes.