Powell says Fed still sees cuts in the rates this year
Election timing won’t affect decision
FRANKFURT, Germany, April 4 (AP): The inflation that has squeezed European shoppers fell more than expected in March to 2.4%, as cost spikes in the grocery aisle eased and overall price rises headed down in the two biggest economies, Germany and France.
The annual figure for the 20 countries that use the euro currency came in below the 2.5% predicted by financial markets and brings the European Central Bank ever closer to its inflation goal of 2%.
But analysts say the decline from 2.6% in February, though welcome, would likely not be enough to move up the ECB’s first interest rate cut.
The bank’s rate-setting council meets next week, but the first reduction in borrowing costs is not expected until June despite an economy that’s failing to grow, several analysts said.
Food inflation fell to 2.7% from 3.9%, and energy prices dropped by 1.8%, according to numbers released Wednesday by Eurostat, the European Union’s statistics agency. Meanwhile, core inflation, which excludes volatile food and energy costs, eased to 2.9% from 3.1% in February.
Annual inflation fell to 2.3% in Germany from 2.7% the month before and to 2.4% in France from 3.2%. The data from Germany - Europe’s largest economy - “brings some relief for the ECB,” said Carsten Brzeski, global head of macro at ING bank.
But prices for services, which include everything from movie tickets to medical care, are still high, and ECB officials will want to see the latest numbers on wage increases, analysts say.
“We think the ECB will commence with rate cuts in June,” said Rory Fennessy, senior economist at Oxford Economics. “While core inflation eased, the stubbornness of services inflation and the desire for the ECB for more wage data makes an April rate cut unlikely.”
The U.S. Federal Reserve also is expected to cut rates later this year. Fed officials have penciled in three rate cuts, even as the decline in inflation there has slowed.
In Europe, inflation spiked to an record high of 10.6% in October 2022 after Russia cut off most of its natural gas to the continent over the war in Ukraine, sending energy prices skyrocketing and driving a cost-of-living crisis.
Along with losing that affordable supply of gas needed to heat homes, generate electricity and power factories, the rebound from the pandemic also strained supply chains, helping push up inflation.
Those price pressures have eased, but now workers are pressing for higher pay to make up for lost purchasing power. That has slowed the decline in inflation and left the ECB wary of cutting interest rates too soon.
The ECB rapidly raised its key rate from minus 0.5% to a recordhigh 4% between July 2022 and September 2023. Raising interest rates fights inflation by making credit to buy things more expensive, driving down spending and easing pressure on prices.
But rate hikes also can hinder economic growth, and the focus has now has turned to when the ECB will declare victory over inflation and start cutting rates to support the stalled economy. The slowdown came as inflation drained consumers’ pocketbooks of purchasing power and rate hikes kicked in.
The eurozone economy didn’t grow in the last three months of 2023, and figures for the first three months of this year are due April 30.
WASHINGTON, April 4, (AP): Federal Reserve officials will likely reduce their benchmark interest rate later this year, Chair Jerome Powell said Wednesday, despite recent reports showing that the U.S. economy is still strong and that U.S. inflation picked up in January and February.
“The recent data do not ... materially change the overall picture,” Powell said in a speech at Stanford University, “which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2% on a sometimes bumpy path.”
Most Fed officials “see it as likely to be appropriate” to start cutting their key rate “at some point this year,” he added.
In his speech, Powell also sought to dispel any notion that the Fed’s interest-rate decisions might be affected by this year’s presidential election campaign. The Fed will meet and decide whether to cut rates during the peak of the campaign, in July and September.
Fed officials will face a delicate decision during those months and during their upcoming meetings in May and June. The policymakers must take care not to cut rates too soon or inflation could stay high - or even reaccelerate. Annual inflation ticked up in February to 2.5%, according to the central bank’s preferred measure, though that was down sharply from its peak of 7.1%.
Yet if Fed officials wait too long to reduce rates, the current high borrowing costs for mortgages, car loans and business loans could seriously weaken the economy - even tip it into a recession.
Though inflation has cooled significantly from its peak, it remains above the Fed’s 2% target. And average prices are still well above their pre-pandemic levels - a source of discontent for many Americans and potentially a threat to President Joe Biden’s reelection bid.
The recent pickup in inflation, though slight, has led some economists to postpone their projections for when the Fed will begin cutting rates. Rate cuts would begin to reverse the 11 increases the Fed carried out beginning in March 2022 to fight the worst inflation bout in four decades. A lower Fed rate would likely lead, over time, to reduced borrowing rates for households and businesses.
Some economists now predict that the central bank’s first rate cut won’t come until July or even later. That expectation has fueled speculation on Wall Street that the Fed might end up deciding to delay rate cuts until after the presidential election. The Fed’s November meeting will take place Nov. 6-7, immediately after Election Day.
Former President Donald Trump has called Powell “political” for considering rate cuts that Trump has said could benefit Biden and other Democrats. Powell was first nominated to be Fed chair by Trump, who has said that, if he is elected president, he
will replace Powell when the chair’s term ends in 2026.
In his speech Wednesday, Powell noted that Congress intended the Fed to be fully independent of politics, with officials serving long terms that don’t coincide with elections.
“This independence,” Powell said, “both enables and requires us to make our monetary policy decisions without consideration of short-term political matters.”
In the past, presidents such as Lyndon Johnson and Richard Nixon sometimes bluntly pressured Fed leaders to cut rates before elections to try to boost the economy. In contrast, recent presidents have avoided publicly pressuring the Fed, with the striking exception of Trump, who denounced Powell for raising the Fed’s benchmark rate in 2018 during the Trump presidency.
“If you look at the modern historical record, you’ll see that the Fed has been prepared to move or not move, and do what it thinks is the right thing for the economy ... without regard to outside considerations,” Powell said, “and it’s important to just have people know
that.”
When they met two weeks ago, Fed officials forecast that they could cut their benchmark rate three times this year. Still, nearly half the 19 policymakers penciled in just two or fewer rate cuts.
Strong economic growth could diminish the likelihood of a Fed rate cut later this year for two reasons. One is that steady hiring and brisk consumer spending can lead companies to raise prices and thereby worsen inflation.
The other reason is that a healthy economy reduces the need for the Fed to cut rates, which tends to stimulate growth. Typically, the central bank reduces its key rate when growth stumbles and companies start cutting jobs. Powell and other officials have underscored that as long as the economy remains healthy, they can take time to assess the path of inflation and ensure that it’s headed back down to their 2% target.
Last week, a government report showed that consumer spending accelerated in February, and prices rose
faster than is consisted with the Fed’s inflation target for the second straight month.
“On inflation, it is too soon to say whether the recent readings represent more than just a bump,” Powell said. “Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.”
In remarks this week, some other Fed officials reiterated their expectations for three quarter-point rate reductions this year, while also underscoring that such cuts would depend on inflation slowing from the January and February readings.
“I think three is still reasonable, but it’s a close call,” Loretta Mester, president of the Federal Reserve’s Cleveland branch, told reporters Tuesday.
Still, Raphael Bostic, president of the Atlanta Fed, said earlier Wednesday on CNBC that he envisions just one interest rate cut this year, likely in the final three months of the year.
Mester and Bostic are among the 12 policymakers with a vote on the central bank’s interest rate decisions this year.