Latest inflation data leaves Fed in wait-and-see mode
The architects of the US monetary policy are not in a hurry to cut interest rates, Federal Reserve chair Jerome Powell confirmed in his latest remarks.
Speaking in an on-stage interview at the Federal Reserve Bank of San Francisco, Powell said policymakers at the central bank were keeping a steady hand and are in no rush to cut the key fed funds rate, which influences borrowing costs for mortgages, credit cards, and all kinds of other loans.
Fed officials have been weighing how high to keep the fed funds rate and for how long, having held it at a 23-year high since July in an effort to cool inflation. High borrowing costs fight inflation by discouraging borrowing and spending, which also drags on the economy. So the Fed’s balancing act is to hold rates just high enough to quench inflation without causing a recession.
“The economy is strong right now, the labour market is strong right now, and inflation has been coming down,” Powell said. “We will be careful about this decision because we can.”
Inflation still above target
Powell’s remarks came after an official government report on inflation Friday showed consumer prices were still increasing faster than the Fed’s target of a 2% annual rate, with data mostly meeting forecasters’ expectations.
Powell and other officials have said they would need more data showing inflation falling before they would reduce interest rates. Although inflation fell rapidly at the end of 2023, data from January and February showed it bouncing back somewhat. Powell said policymakers didn’t want to overreact to either trend, and the latest report hasn’t changed that outlook.
“The decision to begin to reduce rates is a very, very important one because the risks are two-sided. If we reduce rates too soon, there's a chance that inflation would pop back and we'd have to come back in and that would be very disruptive,” Powell said.
“There's also a risk that we would wait too long and that in that case, it could be unnecessary, unneeded damage to the economy and perhaps the labor market.”
The decision to begin to reduce rates is a very, very important one because the risks are two-sided. If we reduce rates too soon, there's a chance that inflation would pop back and we'd have to come back in and that would be very disruptive
JEROME POWELL