Federal Reserve Chairman Jerome H. Powell said Friday that robust 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, leaving them at about 5.3 percent since last July. This relatively high level essentially slows down the economy, including by making it expensive to take out loans to buy a house or start a business. The goal is to keep interest rates high enough long enough to bring inflation back under control.
But price increases have moderated significantly in recent months – inflation was 2.5 percent in February, a report showed Friday, well below and only slightly above its 2022 peak of 7.1 percent by that measure Fed’s 2 percent target. Given that slowdown, officials have been considering when and how much they can cut interest rates this year.
While investors initially hoped that interest rate cuts would come early in the year and be significant, Fed officials recently struck a cautious tone, claiming they wanted more confidence that inflation was under control. Mr. Powell reiterated that message on Friday.
“We can and will be careful in making this decision — because we can,” Powell said in a question-and-answer session with “Marketplace” host Kai Ryssdal in San Francisco. “The economy is strong: we are seeing very strong growth.”
Friday’s personal consumption expenditures report showed that consumer spending is still rising rapidly. Recent hiring data also continues to be solid. Overall, the economy appears to be holding up despite the Fed’s high interest rates.
“That means we don’t have to be in a hurry to make cuts,” Powell said. “That means we can wait and become more confident that inflation will actually fall sustainably to 2 percent.”
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 and risk an unnecessary recession. On the other hand, they don’t want to cut interest rates too early before inflation is fully 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 harder to stamp out in the long run.
Investors are currently assuming that the Fed could start cutting interest rates in June. Fed officials predicted last week that they would likely make three quarter-point interest rate cuts before the end of this year.
While the economy looks strong for now, Mr. Powell suggested the Fed could respond if the labor market shows signs of contraction.
“If we were to see an unexpected weakness in the labor market,” Powell said, “then we would take a close look at it and could respond to it.”
The Fed chief said that while there is always the possibility of a recession, he does not think the risk is high at this time.
“There is no reason to believe the economy is in or about to enter a recession,” Powell said.
“But – humility,” he added.
And Mr. Powell repeatedly alluded to the elephant in the room as the nation heads toward November’s presidential election: the policy of cutting interest rates. There is a risk that the central bank could be criticized for cutting borrowing costs in the run-up to the election, as this can help markets and the economy and could be perceived as favoring the incumbent.
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 the role by President Biden.
The Fed is independent of the White House and its officials emphasize that they set policy with the economy in mind, not politics. Mr Powell repeated this on Friday.
“Integrity is everything,” Mr. Powell said. “We work to serve all Americans, not a particular group of Americans or political parties or leaders.”
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2024-03-29 16:57:12
www.nytimes.com
