Federal Reserve Chairman Jerome Powell at the “FRB Listens” event on Friday, March 22, 2024 in Washington, DC, USA. This week’s three central bank decisions sent a clear message to markets that authorities are preparing to ease. Monetary policy has rekindled investors’ appetite for risk.
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Federal Reserve Chairman Jerome Powell said Wednesday that policymakers will need some time to assess the current state of inflation, leaving the timing of a potential interest rate cut uncertain.
The central bank chief specifically cited stronger price pressures than expected at the start of the year and said he and his colleagues were in no hurry to ease monetary policy.
“It’s too early to tell whether recent statistics indicate more than just an increase in inflation,” Powell said ahead of a question-and-answer session at Stanford University.
“We do not believe it is appropriate to lower interest rates until we have greater confidence that inflation is sustainably declining towards 2%,” he said. “Given the strength of the economy to date and the development of inflation, there is time for future data to guide policy decisions.”
The remarks came two weeks after the Federal Open Market Committee, which decides interest rates, once again voted to keep the benchmark short-term borrowing rate unchanged. Additionally, the committee’s statement after its March 20 meeting included the qualifier “greater confidence” required before cuts.
“A bumpy road”
Markets widely expected the FOMC to begin easing policy by the end of the year, but with inflation remaining high, the Fed had to readjust its outlook on the timing and size of interest rate cuts. Other economic variables, particularly the labor market and consumer spending, are also strong, giving the Fed time to assess the situation before taking action.
The Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditure Price Index, had a 12-month rate of 2.5% in February, compared to a crucial core index excluding food and energy of 2.8%. Virtually all other inflation gauges show inflation rates above 3%.
“Recent data on job growth and inflation are better than expected,” Powell said. “However, recent statistics do not significantly change the picture, with continued strong growth, a strong but rebalancing labor market, and inflation heading down towards 2%, albeit on a bumpy road at times. The situation continues.”
Other Fed officials speaking this week echoed the Fed’s patient approach.
Atlanta Fed President Rafael Bostic told CNBC on Wednesday that he believes there may be only one rate cut soon because of rising prices for some key items. . San Francisco Fed President Mary Daly called three rate cuts a “reasonable standard,” but said there were no guarantees, and Cleveland’s Loretta Mester said a rate cut was likely before the end of the year, but said she expected a rate cut over the long term. It added that interest rates could be higher than expected. All three are FOMC voters.
Powell reiterated that decisions are being made “on a meeting-by-meeting basis” and said only that cuts “will likely become appropriate at some point this year.”
The uncertainty surrounding interest rates has caused some turmoil in the market, with stocks tumbling earlier this week as Treasury yields rose. Markets stabilized on Wednesday, but traders in the federal funds futures market again repriced their interest rate expectations, with the probability implied by the market at one point rising to about 54%, making them slightly less likely to see a June rate cut, according to CME Group data. posed the question.
elections are coming up
In addition to his comments on interest rates, Powell also spent time discussing the Fed’s independence.
As the presidential campaign heats up, Powell pointed out the importance of avoiding political issues.
“Our analysis has no personal or political bias and is in the service of the public,” he said. “We can’t always get it right. No one will. But our decisions are always ours about what’s best for our economy in the medium to long term. and nothing else.”
He also talked about “mission creep,” specifically related to some calls for the Fed to get involved on climate change issues and financial institutions’ preparations for related events.
“We are not the makers of climate change policy, nor do we intend to be,” he said.
Correction: Powell’s remarks came two weeks after the Federal Open Market Committee voted again to keep interest rates on hold. Previous versions had incorrect timing. Rafael Bostic is president of the Atlanta Fed. The city name was incorrectly listed in the previous version.
