Fed Chairman Says Central Bank Should Not Be in “Hurry” to Cut Rates

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

Fed officials raised interest rates sharply from early 2022 to mid-2023, and have left them at around 5.3% since last July. This relatively high level essentially dampens the economy, in part by making it expensive to borrow to buy a home or start a business. The goal is to keep rates high enough, for long enough, that inflation can be controlled.

But price increases have eased considerably in recent months – inflation worked at 2.5 percent In February, a report released Friday showed a rate well below its 2022 peak of 7.1% for that metric and just slightly above the Fed’s 2% target. Given this slowdown, officials have been considering when and how much to cut interest rates this year.

While investors initially hoped rate cuts would come early in the year and be substantial, Fed officials have recently struck a cautious tone, saying they want greater confidence in controlling inflation . Mr. Powell reiterated that message on Friday.

“We can and we will be cautious about this decision — because we can be,” Mr. Powell said, speaking during a question-and-answer session with “Marketplace” host Kai Ryssdal at San Francisco. “The economy is strong: we are seeing very strong growth. »

Friday’s personal consumption expenditures report showed consumers are still spending at a rapid pace. Recent hiring data has also remained strong. Overall, the economy appears to be resilient, even with the Fed’s high interest rates.

“This means we don’t need to be in a rush to cut spending,” Mr. Powell said. “This means we can wait and be more confident that inflation will come down to 2% sustainably. »

The Fed 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 don’t want to cut interest rates too soon, before inflation is fully under control.

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

Investors currently expect the Fed to begin cutting rates in June. Fed officials forecast last week that they would likely make rate cuts of three-quarters of a point before the end of this year.

Even though the economy appears strong at the moment, Mr. Powell suggested that if the labor market begins to show signs of cracking, the Fed could respond.

“If we were to see unexpected weakness in the labor market,” Mr. Powell said, “then that is an issue that we would look at carefully and might respond to as well.” »

The Fed chairman said that while there is still a risk of recession, he doesn’t think the risk is high at the moment.

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

“But… humility,” he added.

And Mr. Powell has repeatedly alluded to the elephant in the room as the country heads toward the November presidential election: the policy of cutting interest rates. There is a risk that the central bank will be criticized for reducing borrowing costs in the run-up to the election, as this can help markets and the economy and may be seen as favoring the incumbent president.

Former President Donald J. Trump, the presumptive Republican nominee, has already criticized the Fed to be political and said Mr. Powell was “going to do something to probably help the Democrats.” Mr. Trump initially elevated Mr. Powell to the role of Fed chairman, although he has since been reappointed to the role by President Biden.

The Fed is independent of the White House and its officials emphasize that they set policy with economics, not politics, in mind. Mr. Powell did not specifically reference Mr. Trump’s comments, but he reiterated the Fed’s commitment to independence on Friday.

“Integrity is paramount,” Mr. Powell said. “We work to serve all Americans, not any particular group of Americans, political parties or leaders.”

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