by Xinhua writer Liu Yanan

NEW YORK, June 21 (Xinhua) -- The U.S. Federal Reserve still has a long way to go in a bid to bring inflation back to its target of 2 percent though inflation has come down materially in recent months.

U.S. inflation pressures continue to run high, and the process of getting inflation back down to 2 percent has a long way to go, Fed Chair Jerome Powell said on Wednesday in remarks at a semiannual hearing organized by the Committee on Financial Services with the U.S. House of Representatives.

Over the 12 months ending in April, total personal consumption expenditures (PCE) prices rose 4.4 percent and core PCE prices, excluding the volatile food and energy categories, grew 4.7 percent from one year ago, according to statistics issued by the Bureau of Economic Analysis under the U.S. Department of Commerce.

It could be harder for the Fed to tame sticky core inflation as monetary policy has its own constraints.

Fed officials recently raised their projection of core inflation for 2023 to 3.9 percent, up from 3.6 percent, with core inflation in 2024 expected to linger at 2.6 percent.

Reducing inflation is likely to require a period of below-trend growth and some softening of labor market conditions, noted Powell.

"It will either take a prolonged period of below-trend growth or a mild downturn to bring PCE inflation to the Fed's 2 percent target over the forecast horizon, and our forecast assumes the latter," said strategists with the Bank of America Global Research in a mid-year review.

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on June 14, 2023. (Xinhua/Liu Jie)

The Fed is expected to raise benchmark interest rates by another 50 basis points within 2023 though it chose to pause in June after a streak of ten rate hikes since last March.

"We will continue to make our decisions meeting by meeting, based on the totality of incoming data and their implications for the outlook for economic activity and inflation, as well as the balance of risks," said Powell.

No decision had been made for the Fed's monetary policy meeting in July, Powell said on June 14 when the Fed decided to hold the federal fund rate unchanged after ten hikes in a row since last March.

The 30-day Fed funds futures now price in near 80 percent of probability of another hike of 25 basis points in July, according to data from the CME FedWatch Tool on Wednesday.

The Fed would hike rates by 25 basis points in July followed by another hike of 25 basis points in September, according to the Bank of America Global Research.

A pause in rate hikes might seem imprudent considering the current inflation data, according to a mid-year outlook report unveiled by UBS on Tuesday.

If inflation doesn't come down as expected by the Fed by the end of 2023, "you will see a stronger response from the Fed," said Mark Haefele, chief investment officer at UBS Global Wealth Management at a virtual media roundtable meeting on Tuesday.

Although the Fed has indicated it intends to resume rate increases, the latest monetary statement shows the deep divisions on the Federal Open Market Committee (FOMC) that need to be bridged to reach a consensus, according to the UBS report.

"Furthermore, we think it could get harder to restart hikes as the U.S. presidential election season approaches," said UBS strategists in the report.

Investors may now need to consider that "the Fed may be willing to let inflation stay modestly above target for an extended period," said the UBS report.

Still, the longer inflation stays at elevated levels, the high possibility that consumers' inflation expectations go up, which would have dire implications for the economy.

Despite elevated inflation, longer-term inflation expectations appear to remain well anchored, said Powell.

Fed officials are not going to change their inflation expectations any time soon and the market isn't expecting that to happen, according to Haefele.

U.S. consumers' long-run inflation expectations remained elevated at 3 percent in June, higher than the range of 2.2 percent to 2.6 percent in the two years prior to the COVID-19 pandemic, according to the latest survey by the University of Michigan.