Jerome H. Powell, chairman of the Federal Reserve, reiterated on Wednesday that the central bank may bide its time before cutting interest rates as inflation weakens and economic growth slows.
The central bank chief also used a speech at Stanford to emphasize the Fed’s independence from politics, a relevant message at a time when the election season threatens to pull Fed policy into an uncomfortable spotlight.
This year is a big one for the Fed: After many months of soaring inflation, rate hikes are finally winding down. That means central bankers may soon be able to cut interest rates from their highest levels in two decades. The Fed raised interest rates to 5.3% from March 2022 to mid-2023 to cool the economy and bring inflation down.
However, it is difficult to know when and how much to cut interest rates. Inflation has slowed more slowly in recent months, and the Fed is reluctant to cut rates too early and is failing to fully get price increases under control. Investors initially expected the Fed to cut interest rates early this year, but now see the first move coming in June or July as officials wait for more evidence that inflation has actually moderated.
“On inflation, it’s too early to say whether the recent readings represent more than just a blip,” Mr. Powell said. “We do not expect it would be appropriate to cut our policy rates until we have more confidence that inflation is moving steadily towards 2 percent.”
“Given the strength of the economy and the progress in inflation so far, we have time to let incoming data guide our policy decisions,” he added. He called reducing inflation a “sometimes bumpy road.”
Fed officials are facing pressure from all sides as they consider their next move. While officials want to make sure they have fully suppressed inflation, many economists also warn that keeping interest rates too high for too long could strain the economy more than necessary and cause job losses.
“There is no path without risks,” Mr. Powell acknowledged on Wednesday.
Inflation eased rapidly in 2023, both as global supply chains healed – allowing goods prices to fall – and as prices for some services, such as rent, stopped rising so sharply. Service prices are partly linked to wage increases, which have moderated as more workers have joined the workforce, thanks in part to strong immigration.
“There may be more supply-side gains,” Mr. Powell said, noting that the Fed’s policies may also weigh on demand for big purchases such as autos and in the labor market.
As the Fed waits to see what happens, taking time to get started on rate cuts means the Fed’s first rate cut — and any subsequent ones — could come just as the campaign heats up ahead of the presidential election. of November.
Former President Donald J. Trump, the presumptive Republican nominee, has already criticized the Fed as being political and said Mr. Powell “will do something to possibly help the Democrats.” Mr. Trump elevated Mr. Powell to the role of Fed chairman, although he has since been reappointed to that role by President Biden.
The Fed is independent from the White House, and its officials often stress that they are policy-oriented with an eye on the economy, not politics. Mr. Powell did so on Wednesday, explaining that the Fed is insulated from partisan bickering and is determined to ignore such pressures.
“We’re just calling balls and strikes in the economy as we see them,” Mr. Powell said. He later added that when the Fed is considering its policy path, “it doesn’t matter what the election calendar says.”
But the Fed chairman also rejected calls for the Fed to do more on issues like climate change, a demand that often comes from Democrats.
“We also need to avoid ‘mission creep,'” Mr. Powell said, citing climate change as something outside the Fed’s purview. “Policies to address climate change are the business of elected officials and those agencies charged with this responsibility.”
The Fed, he said, has “a narrow role related to our responsibilities as a bank supervisor” but is likely to come under pressure to expand that role and “we are not, nor do we seek to be, climate policymakers.”
While Mr. Powell has been careful to avoid talking about immigration policy, he has repeatedly noted that stronger-than-expected immigration has helped the economy grow more strongly than economists thought it could, even as inflation has faded.
The Congressional Budget Office this year raised its expectations for US labor force growth and economic growth in light of immigration trends. When more people come into the country and labor force, there is more profit and spending in the economy and production can expand without overheating the labor market.
“Our economy was short labor, and probably still is,” Mr. Powell said, but immigration “explains what we’ve been wondering, which is, ‘How can the economy have grown more than 3 percent in a year? where almost every outside economist was predicting a recession?’
