Federal Reserve Chair Jerome Powell said he was pleased with how inflation had resumed a downtrend following a rebound at the start of the year but said it was too soon to say whether the central bank might be able to lower interest rates by the end of the summer, as investors increasingly anticipate. 

“We’ve made a lot of progress,” Powell said Tuesday on a panel with other central bankers at a conference in Portugal. After serious shortages two years ago that sent wages up sharply, the labor market has “seen a pretty substantial move toward better balance,” he said.

The Fed leader’s remarks underscored a sense of cautious optimism that had faded after disappointing inflation readings in April. He alternately said the economy had made “significant progress,” “real progress” and “quite a bit of progress” toward cooler inflation with stable growth.

But he maintained his circumspect approach toward lowering rates, which suggested a rate cut at the central bank’s meeting later this month remains unlikely. Fed officials are especially wary of cutting too soon after surprisingly hot price increases greeted them at the beginning of the year.

“We want to be more confident that inflation is moving sustainably down,” Powell said. “We want to understand that the levels that we’re seeing are a true reading on what is actually happening with underlying inflation.”

Economic projections released last month showed most Fed officials expect to cut interest rates once or twice this year if inflation slows and growth is solid but unspectacular. Their next meeting is July 30-31, where they are expected to hold rates steady at their highest level in more than two decades. Markets are focused on whether officials at that meeting might lay the groundwork for a rate cut at their subsequent gathering in September.

Officials will have three more months of data on hiring, inflation and spending before then, making it difficult to firmly stake out a view right now on what may be a finely balanced decision. Powell declined to say whether he was setting the table for a September cut. “I’m not going to be landing on any specific dates here today,” he said.

Investors in interest-rate futures markets see a roughly 70% chance that the first Fed cut occurs by September, according to CME Group. U.S. stock indexes rose Tuesday, with the S&P 500 and Nasdaq Composite hitting records.

To determine whether and when to lower interest rates, officials must balance two risks. The first is that a continuing cooling in the labor market accelerates in a way that is hard to stop once it starts. The second is that lower rates ignite economic activity and allow inflation to settle out above their goal. 

Inflation fell to 2.6% in May, according to the Fed’s preferred gauge, down from 4% one year earlier but still above the Fed’s 2% target. 

Fed officials say they can take their time to cut interest rates so long as the labor market stays healthy. While payroll growth has been solid this year, there are signs that consumer spending is finally slowing in line with what officials have long anticipated. “It’s very much understood by us that we have two-sided risks,” Powell said.

The Fed raised rates at the fastest pace in 40 years in 2022 and 2023 to combat inflation that also rose to a four-decade high. They have held their benchmark rate in a range between 5.25% and 5.5% since last July.

Officials were surprised in the second half of last year by how rapidly price growth slowed despite strong spending and hiring, leading them to shift their attention away from how high to raise rates and toward how long to wait before cutting them. Inflation turned around after that, derailing expectations by investors and the Fed itself that the central bank might have been able to cut rates by now.

Powell deflected worries Tuesday about firmer services inflation by suggesting that some components, such as housing, reflected lagged price increases that might not reflect current supply-and-demand dynamics.

Instead, Powell focused his attention on labor-market conditions and wages, which have slowed gradually in a way that has clearly satisfied Fed leaders. “You can see the labor market is cooling off, appropriately so, and we’re watching it very carefully,” he said. Powell repeated his view that a sudden deterioration in employment growth could spur a faster turn to rate cuts.