Jerome H. Powell, chairman of the Federal Reserve, said on Friday that resilient economic growth gives the central bank the flexibility to be patient before cutting interest rates.
Fed officials raised interest rates sharply from early 2022 to mid-2023 and have left them at around 5.3% since last July. This relatively high level effectively puts the brakes on the economy, in part by making it expensive to borrow money to buy a home or start a business. The goal is to keep interest rates high enough, long enough, to bring inflation back under control.
However, price increases have moderated significantly in recent months – inflation reached 2.5% in February, according to a report on Friday, well below the 7.1% peak in 2022 for that range and slightly above the Fed’s 2% target. Given that slowdown, officials have been mulling when and how much they can cut rates this year.
While investors initially hoped rate cuts would come early in the year and be substantial, Fed officials have recently struck a cautious tone, saying they want more confidence that inflation was under control. Mr. Powell repeated that message on Friday.
“We can, and we will be careful with this decision — because we can,” Mr. Powell said, speaking in a question-and-answer session with “Marketplace” host Kai Ryssdal in San Francisco. “The economy is strong: We are seeing very strong growth.”
Friday’s Personal Consumer Expenditure report showed consumers are still spending at a brisk pace. Recent hiring data also held steady. Overall, the economy appears to be holding up even with the Fed’s high interest rates.
“That means we don’t have to rush to cut,” Mr. Powell said. “It means we can wait and become more confident that, in fact, inflation is coming down to 2 percent on a sustainable basis.”
The Fed is trying to balance two risks: On the one hand, officials don’t want to keep interest rates too high for too long, risking an unnecessary recession. On the other hand, they don’t want to cut interest rates too early, before inflation is fully under control.
If high inflation persists for years, it can become embedded in the economy as people and firms adjust their behavior, making it even more difficult to eliminate in the long run.
Investors currently expect the Fed may start cutting interest rates in June. Fed officials predicted last week that they were likely to cut interest rates by three basis points before the end of this year.
While the economy looks strong for now, Mr. Powell suggested that if the labor market starts to show signs of cracking, the Fed may react.
“If we were to see unexpected weakness in the labor market,” Mr. Powell said, “then that’s something we would look at closely and we might get a response as well.”
The Fed chairman said that while there is always a chance of a recession, he did not think the risk was high at this time.
“There is no reason to believe that the economy is in a recession or on the verge of one,” Mr. Powell said.
“But—humility,” he added.
And Mr. Powell has repeatedly referred to the elephant in the room as the nation prepares for November’s presidential election: the policy of cutting interest rates. There is a risk that the central bank will be criticized for cutting borrowing costs ahead of elections, as doing so can help markets and the economy and can be perceived as favoring the incumbent.
Former President Donald J. Trump, the presumptive Republican nominee, has already criticized the Fed as being political and said Mr Powell “would do something to possibly help the Democrats”. Mr. Trump initially elevated Mr. Powell to the role of Fed chairman, though he has since been reappointed to that role by President Biden.
The Fed is independent from the White House, and its officials emphasize that they are policy-oriented with an eye on the economy, not politics. Mr. Powell did not specifically address Mr. Trump’s comments, but reiterated the Fed’s commitment to independence on Friday.
“Integrity is everything,” Mr. Powell said. “We work to serve all Americans, not any particular set of Americans or political parties or leaders.”
