Fed Chair Powell Wants Inflation to Cool More

Fed Chair Powell Wants Inflation to Cool More

Federal Reserve Chairman Jerome H. Powell reiterated Wednesday that the central bank can take its time before cutting interest rates as inflation eases and economic growth continues.

The central bank chief also used a speech at Stanford to emphasize the Fed’s independence from politics, a relevant message at a time when election season threatens to put Fed policy in an uncomfortable spotlight.

This year is a big one for the Fed: After long months of rapid inflation, price increases are finally easing. That means central bankers may soon be able to cut interest rates from their highest level in two decades. The Fed raised interest rates to 5.3 percent from March 2022 to mid-2023 to cool the economy and curb inflation.

However, it is difficult to know when and how much interest rates should be reduced. Inflation has slowed in recent months, and the Fed doesn’t want to cut interest rates too soon and completely control price increases. Investors had originally expected the Fed to cut interest rates early this year, but are now anticipating a first move in June or July as officials wait for more evidence that inflation has truly eased.

“As far as inflation is concerned, it is still too early to say whether the recent readings represent more than just an increase,” Powell said. “We do not believe it will be appropriate to cut our key interest rate until we have greater confidence that inflation is moving sustainably toward 2 percent.”

“Given the strength of the economy and the progress on inflation so far, we have time to let the incoming data guide our policy decisions,” he added. He called reducing inflation a “sometimes bumpy road.”

As they consider their next move, Fed officials are under pressure from all sides. While officials want to ensure they have fully suppressed inflation, many economists also warn that keeping interest rates too high for too long could put more strain on the economy than necessary and lead to job losses.

“There is no risk-free path,” Mr. Powell acknowledged on Wednesday.

Inflation cooled rapidly in 2023 as both global supply chains recovered, allowing goods prices to fall, and prices for a range of services, such as: B. Rent, no longer increased as much. Prices for services are partly due to wage increases, which have moderated as more workers have been added to the labor pool, partly due to high immigration.

“There may be further supply-side gains to be had,” Powell said, noting that Fed policy could also weigh on demand for large purchases like cars and the labor market.

While the Fed waits to see what happens and takes its time to begin cutting rates, that means the Fed’s first rate cut – and any subsequent ones – could come just as the campaign heats up ahead of November’s presidential election.

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

The Fed is independent of the White House, and its officials often emphasize that they set policy with the economy in mind, not politics. Mr. Powell did so on Wednesday, saying the Fed was insulated from partisan disputes and determined to ignore such pressures.

“We’re just giving the economy the courage to hit as we see it,” Powell said. He later added that as the Fed considers its policy course, “it doesn’t matter what’s on the election calendar.”

But the Fed chairman also rejected calls for the Fed to do more on issues like climate change, a demand that often comes from Democrats.

“We also need to avoid ‘mission creep,'” Powell said, calling climate change something beyond the Fed’s control. “Policies to combat climate change are the responsibility of elected officials and the agencies that have appointed them to this responsibility.”

He said that the Fed “plays a narrow role that is related to our responsibilities as a bank regulator” but that it will likely come under pressure to expand that role and “we are not climate policymakers, nor do we want to be.” “

Although Mr. Powell was careful not to talk about immigration policy, he repeatedly noted that higher-than-expected immigration has helped the economy grow faster than economists thought possible, even as inflation has eased.

The Congressional Budget Office raised its expectations for U.S. labor force growth and economic growth this year amid immigration trends. When more people come into the country and are employed, there is more income and spending in the economy, and production can increase without overheating the labor market.

“Our economy was, and probably still is, plagued by labor shortages,” Powell said, but immigration “explains what we’ve been asking ourselves, which is, ‘How can the economy survive in a year when almost all… Has an outside economist predicted a recession?’”

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2024-04-03 17:32:12