Home Business Fed Chair Says Central Bank Doesn't Need to 'Hurry' to Cut Rates

Fed Chair Says Central Bank Doesn't Need to 'Hurry' to Cut Rates

by SuperiorInvest

Federal Reserve Chairman Jerome H. Powell said Friday that resilient economic growth is giving the central bank the flexibility to be patient before cutting interest rates.

Fed officials sharply raised interest rates from early 2022 to mid-2023, leaving them at around 5.3 percent since last July. That relatively high level essentially slows the economy, in part by making it more expensive to borrow to buy a home or start a business. The goal is to keep rates high enough, for long enough, to bring inflation back under control.

But price increases have cooled noticeably in recent months: Inflation was 2.5 percent in February, a report on Friday showed, well below its peak of 7.1 percent in 2022 for that indicator. and just slightly above the Federal Reserve's 2 percent target. Given that slowdown, officials have been considering when and how much they can cut interest rates this year.

While investors were initially hopeful that rate cuts would come early in the year and be substantial, Federal Reserve officials recently struck a cautious tone, maintaining that they want greater confidence that inflation was under control. Powell reiterated that message on Friday.

“We can, and we will, be careful with this decision, because we can be,” Powell said, speaking in a question-and-answer session with “Marketplace” host Kai Ryssdal in San Francisco. “The economy is strong: we see very strong growth.”

Friday's personal consumption spending report showed that consumers are still spending at a rapid pace. Recent hiring data has also remained strong. All in all, the economy appears to be holding strong even with the Federal Reserve's high interest rates.

“That means we don't need to be in a rush to cut,” Powell said. “It means we can wait and have more confidence that inflation is in fact coming down to 2 percent on a sustainable basis.”

The Federal Reserve is trying to balance two risks: On the one hand, officials don't want to keep interest rates too high for too long, risking an unnecessary recession. On the other hand, they do not want to cut interest rates too soon, before inflation is completely under control.

If high inflation persists for years, it can become entrenched in the economy as people and businesses adjust their behavior, making it even more difficult to eradicate in the long term.

Investors currently expect the Federal Reserve to begin lowering rates in June. Federal Reserve officials projected last week that they would likely make three quarter-point rate cuts before the end of this year.

While the economy appears strong for now, Powell suggested that if the labor market began to show signs of breaking down, the Federal Reserve could react.

“If we saw unexpected weakness in the labor market,” Powell said, “then that's something we would be looking at carefully and could get a response to as well.”

The Federal Reserve chairman said that while there is always the possibility of a recession, he did not believe the risk was high at this time.

“There is no reason to think the economy is in a recession or on the verge of one,” Powell said.

“But… humility,” he added.

And Powell repeatedly alluded to the elephant in the room as the nation heads into November's presidential election: the politics of interest rate cuts. There is a risk that the central bank will be criticized for reducing borrowing costs in the run-up to the election, as doing so may help markets and the economy and may be perceived as favoring the incumbent.

Former President Donald J. Trump, the presumptive Republican nominee, already criticized the Federal Reserve for being political and said Powell was going to “do something to probably help the Democrats.” Trump was the first to elevate Powell to the position of chairman of the Federal Reserve, although President Biden has since reappointed him to that position.

The Federal Reserve is independent of the White House and its officials stress that they set their policies with the economy, not politics, in mind. Powell did not specifically reference Trump's comments, but he did reiterate the Federal Reserve's dedication to independence on Friday.

“Integrity is everything,” Powell said. “We are working to serve all Americans, not any particular group of Americans or political parties or leaders.”

Source Link

Related Posts