April 19, 2024

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The Fed chief says the central bank doesn't need to “rush” to cut interest rates

The Fed chief says the central bank doesn't need to “rush” to cut interest rates

Resilient economic growth gives the central bank the flexibility to be patient before cutting interest rates, Federal Reserve Chairman Jerome Powell said on Friday.

Federal Reserve 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 puts pressure on the economy, in part by making it expensive to borrow to buy a home 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 slowed significantly in recent months — inflation reached 2.5 percent in February, Friday's report showed, well below its peak of 7.1 percent in 2022 for that measure and slightly above the Fed's target of 2 per cent. The hundred. Given this slowdown, officials have been weighing when and how much they can cut interest rates this year.

While investors initially hoped interest rates would be cut early in the year and would be significant, Fed officials have recently taken a dovish tone, stressing that they want greater confidence that inflation is under control. Mr. Powell repeated that message on Friday.

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

Friday's personal consumption expenditures report showed that consumers are still spending at a rapid pace. Recent employment data also remained strong. Overall, the economy appears to be holding up even with the Fed's higher interest rates.

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“This means we do not need to rush to cut,” Powell said. “This means we can wait and become more confident that inflation will actually fall to 2% on a sustainable basis,” he added.

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

If high inflation persists for years on end, it can become embedded in the economy as people and businesses adjust their behavior, making it more difficult to eliminate in the long term.

Investors are currently anticipating that the Federal Reserve will begin cutting interest rates in June. Fed officials predicted last week that they were likely to make quarter-point rate cuts before the end of this year.

While the economy appears strong at the moment, Mr. Powell noted that if the labor market begins to show signs of collapse, the Fed may react.

“If we see unexpected weakness in the labor market, that's something we'll look at carefully, and we can formulate a response to it as well,” Powell said.

The Fed chairman said that although there is always a chance of a recession, he does not believe the risks are high right now.

“There is no reason to believe that the economy is in recession or on the verge of recession,” Powell said.

“But – humility,” he added.

Mr. Powell has repeatedly alluded to the elephant in the room as the country heads toward the presidential election in November: the policy of lowering interest rates. There is a risk that the central bank could be criticized for cutting borrowing costs in the run-up to the election, because doing so could help markets and the economy and could be seen as favoring the incumbent.

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Former President Donald J. Trump, the presumptive Republican nominee, has already done so He criticized the Fed Being a politician, he said that Mr. Powell “would do something to maybe help the Democrats.” Mr. Trump first elevated Mr. Powell to Fed chair, though he has since been reappointed to that position by President Biden.

The Fed is independent from the White House, and its officials stress that it sets policy with an emphasis on the economy, not politics. Mr. Powell reiterated that on Friday.

“Integrity is everything,” Mr. Powell said. “We work to serve all Americans, not a specific group of Americans, political parties or leaders.”