Jerome Powell underlined the Federal Reserve’s political independence and stated that robust economic growth allows policymakers to remain patient.
The Federal Reserve’s chair, Jerome H. Powell, stated on Friday that the economy is growing steadily, which allows the bank to take its time lowering interest rates.
From early 2022 to mid-2023, interest rates were dramatically boosted by Fed officials, who have since maintained them at roughly 5.3 percent since last July. The economy is effectively restrained by that comparatively high level, partly because to the high cost of borrowing needed to launch a business or purchase a home. The objective is to maintain rates high enough, for a long enough period of time, to rein in inflation.
However, price hikes have significantly decreased recently. According to a report released on Friday, inflation in February was 2.5%, significantly lower than the 7.1 percent top for that gauge in 2022 and just marginally higher than the Federal Reserve’s 2 percent target. Officials have been debating when and how much to lower interest rates this year in light of that slowdown.
Although investors had anticipated significant rate cuts early in the year, Fed officials have subsequently adopted a more cautious stance, stating that they needed increased assurance that inflation is under control. On Friday, Mr. Powell restated that message.
During a Q&A session with “Marketplace” host Kai Ryssdal in San Francisco, Mr. Powell stated, “We can, and we will be, careful about this decision—because we can be.” “The economy is doing well; growth is very strong.”
The Personal Consumption Expenditures report released on Friday indicated that consumers are continuing to spend quickly. Additionally, recent hiring statistics has stayed stable. Overall, it appears that despite the Fed’s high interest rates, the economy is holding up.
Mr. Powell stated, “That means we don’t need to be in a hurry to cut.” It implies that we can hold off and grow more certain that inflation will, in fact, decline to 2% on a sustainable basis.
The Fed is attempting to strike a balance between two risks: on the one hand, officials do not want to risk an unneeded recession by maintaining interest rates too high for too long. However, they are reluctant to lower interest rates too soon, before inflation has completely stabilized.
Long-term high inflation can become ingrained in the economy as individuals and businesses change how they operate, making it more difficult to eradicate in the long run.
As of right now, investors anticipate that the Fed may start cutting rates in June. It was forecast last week by Fed officials that they would probably drop rates by three quarter points before the year ended.
Even though the economy appears to be doing well right now, Mr. Powell hinted that the Fed may move if the labor market started to falter.
In addition to closely examining the situation, Mr. Powell stated, “we could draw a response if we saw unexpected weakness in the labor market.”
Although a recession is always possible, according to the Fed chair, the risk is not particularly high right now.
Mr. Powell stated, “There’s no reason to think that the economy is in or about to enter a recession.”
And as the country heads toward November’s presidential election, Mr. Powell made numerous references to the politics surrounding interest rate decreases, which is the elephant in the room. Because lowering borrowing costs in the run-up to an election can boost the economy and markets and may be seen as supporting the incumbent, there is a chance that the central bank will come under fire.
The likely Republican nominee, former president Donald J. Trump, has already attacked the Fed for being politicized and claimed that Mr. Powell was “going to do something to probably help the Democrats.” Mr. Powell was initially named Fed chair by Mr. Trump, but President Biden has since nominated him again.
Officials at the Federal Reserve emphasize that they make policy with the economy in mind, not politics, and that the Fed is independent of the White House. On Friday, Mr. Powell restated that.
“What matters most is integrity,” Mr. Powell stated. “We are serving all Americans, not just a select group of Americans, political parties, or elites.”