Fed chair says central bank doesn’t need to ‘rush’ to cut rates

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By journalsofus.com

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

Fed officials raised interest rates sharply from early 2022 to mid-2023, and they have left them at around 5.3 percent since last July. That relatively high level essentially puts the brakes on the economy, partly by making it more expensive to borrow money to buy a home or start a business. The goal is to keep rates high long enough to get inflation under control.

But price increases have slowed significantly in recent months — a report on Friday showed that inflation stood at 2.5 percent in February, well below its peak of 7.1 percent in 2022 for that gauge — and the Fed. was slightly above the 2 percent target. In view of the recession, officials are considering when and by how much they can cut interest rates this year.

While investors initially expected rate cuts early in the year to be substantial, Fed officials have recently taken a cautious stance, saying they want more confidence that inflation is under control. Mr Powell reiterated that message on Friday.

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

Friday’s personal consumption expenditure report showed consumers are still spending at a brisk pace. Recent hiring data also remains solid. Overall, the economy appears to be holding up despite the Fed’s high interest rates.

“That means we don’t need to rush into making cuts,” Mr. Powell said. “This means we can wait and be more confident that inflation is, in fact, getting down to 2 percent on a sustainable basis.”

The Fed is trying to balance two risks: On the one hand, officials do not want to keep interest rates high for too long, risking an unnecessary recession. On the other hand, they do not want to cut interest rates too quickly, before inflation is fully under control.

If high inflation persists for years, it may become embedded in the economy as people and companies adjust their behavior, making it even more difficult to deal with in the long run.

Investors are currently hopeful that the Fed may start reducing rates in June. Fed officials estimated last week that they could cut rates by three quarters of a point before the end of the year.

While the economy looks strong right now, Mr. Powell suggested the Fed could respond if the job market starts showing signs of deterioration.

“If we see unexpected weakness in the labor market, that’s something we will be watching carefully, and may respond to as well,” Mr. Powell said.

The Fed Chairman said that while the possibility of a recession always remains, he did not think the risk was high at this time.

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

“But – humility,” he said.

And Mr. Powell repeatedly pointed to the elephant in the room as the country heads toward the November presidential election: the politics of interest rate cuts. There is a risk that the central bank may be criticized for cutting borrowing costs before the elections, as doing so could help markets and the economy and could be perceived as favoring those in power.

Former President Donald J. Trump, the presumptive Republican nominee, has already criticized the Fed for being political and said Mr. Powell was “probably going to do something to help the Democrats.” Mr Trump first promoted Mr Powell to the role of Fed chair, although he has been reappointed to the role by President Biden.

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

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

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