Federal Reserve Chairman Jerome H. Powell reiterated Wednesday that the central bank can take its time before cutting interest rates as inflation recedes and economic growth sustains.
The central bank chief also emphasized the Fed's independence from politics in a speech at Stanford University, a fitting message at an election season when the Fed's policies could be thrust into an uncomfortable spotlight.
This year will be an important year for the Fed. After months of rapid inflation, price increases are finally slowing down. This means central bankers could soon be able to lower interest rates from their highest levels in 20 years. The Fed has raised its policy rate to 5.3% from March 2022 to mid-2023 in an effort to cool the economy and slow inflation.
However, it is difficult to determine when and by how much interest rates will be lowered. Inflation has slowed more slowly in recent months, and the Fed doesn't want to cut rates too soon and completely lose control of price rises. Investors initially expected the Fed to cut interest rates early this year, but now the first steps are expected to take place in June or July as officials await further evidence that inflation has truly eased. I'm looking at it.
“When it comes to inflation, it's too early to tell whether recent statistics indicate more than just an increase,” Powell said. “We do not believe it is appropriate to lower the policy rate until we have greater confidence that inflation is sustainably declining towards 2%.”
“Given the strength of the economy to date and the development of inflation, there is time for future data to guide policy decisions,” he added. He said curbing inflation was “sometimes a difficult path”.
Fed officials are under pressure from all sides as they consider their next move. Officials want to bring inflation under control completely, but many economists believe that keeping interest rates too high for too long could unnecessarily strain the economy and cause job losses. I'm warning you that there is.
“There is no risk-free path,” Powell acknowledged Wednesday.
In 2023, inflation subsided quickly as global supply chains recovered, commodity prices fell, and prices for many services, such as rent, stopped rising rapidly. Service prices are partly linked to wage increases, but as the number of workers increases due to factors such as increased immigration, wage increases are becoming more gradual.
“There could be further gains on the supply side,” Powell said, noting that Fed policy could also weigh on demand for big-ticket purchases such as cars and on the labor market.
The slow start of rate cuts as the Fed waits to see what happens means that the Fed's first rate cut and subsequent rate cuts come just as campaigning is intensifying in the lead-up to the November presidential election. It means that there is a possibility that it will be done.
Former President Donald J. Trump, the presumptive Republican nominee, has already criticized the Fed for being political, and Powell said he is “probably going to do something to help the Democrats.” Mr. Trump first promoted Mr. Powell to the role of Fed chairman, but he was later reappointed to the position by President Biden.
The Fed is independent from the White House, and officials often stress that they look to economics, not politics, to make policy decisions. Mr. Powell did so on Wednesday, explaining that the Fed is insulated from partisan bickering and determined to ignore such pressures.
“We're just expecting balls and strikes in the economy,” Powell said. He later added that when the Fed considers its policy direction, “it doesn't matter what the election calendar says.”
But the Fed chair also pushed back on calls for the Fed to do more on issues like climate change, which are also often called for by Democrats.
Powell said climate change is an issue that is beyond the scope of the Fed, adding, “We also need to avoid 'mission creep.' “Policies that address climate change are the work of elected officials and the agencies to which they have taken on this responsibility.”
He said the Fed has a “narrow role related to its banking supervisory responsibilities,” but will likely come under pressure to expand that role, adding: “We are not climate change policy makers, and we are not. I have no intention of doing so.” ”
Powell carefully avoided commenting on immigration policy, but reiterated that a larger-than-expected influx of immigrants has led to stronger economic growth than economists expected, even as inflation has receded. It pointed out.
This year, the Congressional Budget Office raised expectations for the U.S. labor force and economic growth based on immigration trends. More people entering the country and entering the labor force will increase income and spending in the economy, allowing production to expand without overheating the job market.
“Our economy has always been, and probably still is, in a labor shortage,” Powell said, but “immigration is an answer to what we've been asking ourselves: 'Are we in a situation where almost all workers are in short supply?' “And how was the economy able to grow by more than 3% in one year?” Did an outside economist predict a recession? ”
