Jerome H. Powell, chairman of the Federal Reserve, said Friday that regular economic growth gives the central bank the flexibility it needs to be patient before cutting interest rates.
Fed officials raised interest rates sharply from early 2022 to mid-2023 and left them at around 5.3% as of last July. This relatively high level essentially drags down the economy, partly by making it expensive to borrow to buy a house or start a business. The goal is to keep interest rates high enough for long enough to bring inflation back under control.
But price gains have moderated markedly in recent months, with inflation at 2.5 percent in February, according to Friday’s report, well below the 2022 high of seven.1 percent for that gauge and barely above the Fed’s 2 percent goal. Due to this slowdown, officials are wondering when and by how much they’ll cut interest rates this 12 months.
While investors initially hoped the rate cuts would come early in the 12 months and be significant, Fed officials have recently adopted a cautious tone, maintaining they need more certainty that inflation is under control. Mr. Powell repeated that message on Friday.
“We can and will be careful in making this decision — because we can,” Mr. Powell said during 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 spending report showed that buyers proceed to spend at a rapid pace. Recent employment data also remained solid. Overall, the economy appears to be doing well even with the Fed’s high interest rates.
“It means we don’t have to rush into cutting,” Mr. Powell said. “This means we can wait and become more confident that inflation will actually fall to 2 percent on a sustained basis.”
The Fed is trying to balance two risks: On the one hand, officials don’t desire to keep interest rates too high for too long and risk an unnecessary recession. On the other hand, they do not want interest rates to be reduced too early, before inflation is fully brought under control.
If high inflation continues for years, it could grow to be entrenched in the economy as people and corporations adjust their behavior, making it even tougher to eradicate in the future.
Investors now expect the Fed may start cutting interest rates in June. Fed officials predicted last week that they’d likely make three quarter-point rate cuts before the end of this 12 months.
While the economy looks strong for now, Powell suggested that if the labor market shows signs of collapse, the Fed could respond.
“If we saw unexpected weakness in the labor market,” Powell said, “then we would look at it closely and we could draw conclusions as well.”
The Fed chairman said that while the risk of a recession is all the time there, he doesn’t think the risk is high without delay.
“There is no reason to believe that the economy is in or on the verge of a recession,” Powell said.
“But… humility,” he added.
And Mr. Powell repeatedly alluded to the elephant in the room as the nation hurtles toward November’s presidential election: the policy of cutting interest rates. There is a risk that the central bank might be criticized for lowering borrowing costs in the run-up to the election, as this might help markets and the economy and might be seen as favoring the incumbent president.
Former President Donald J. Trump, the presumptive nominee of the Republican Party, has already done so criticized the Fed for being political and said Mr. Powell was “going to do something that will probably help Democrats.” Mr. Trump first elevated Mr. Powell to the post of Fed chairman, although he has since been reappointed to the position by President Biden.
The Fed is independent of the White House, and its officials emphasize that they consider the economy, not politics, when setting policy. Mr. Powell repeated this on Friday.
“Honesty is paramount,” Mr. Powell said. “We work to serve all Americans, not any particular group of Americans, political parties or leaders.”
