Federal Reserve Chairman Jerome Powell talked of the central bank’s non-hurry in the effort to cut interest rates, highlighting the stable state of the U.S. economy and the continued progress of inflation. He said in a press conference last week that even if inflation has slowed down from its peak, the Fed is carefully avoiding a premature declaration of victory.
“With the economy growing at a solid rate, a strong labor market, and inflation having moderated significantly, we have the luxury of waiting until we are confident that inflation is moving sustainably toward our 2 percent target before we even begin to consider a cut,” said Powell last week.
Powell’s comments follow growing speculation as to when the Fed would begin a rate cut, with its current range at a baseline 23-year high of between 5.25% and 5.50%. Many economists and investors had expected cuts sometime in March, but Powell indicated such a cut might not happen till late this, or never.
Economic data in recent months has supported the Fed’s cautious stance. The U.S. economy grew at an annualized rate of 3.3% in the fourth quarter of 2023; defiance of expectations was followed by the level of all-time lows in unemployment and the fast growth of wages above inflation, fostering consumer spending activity.
On the inflation front, the Personal Consumption Expenditures (PCE) index, the Fed’s preferred measure, rose just 2.6% in December from a year earlier, down sharply from its peak of 7.1% mid-2022. But Powell indicated that core inflation, which excludes volatile food and energy prices, remains high at 2.9%, emphasizing the need for caution.
Financial markets reacted moderately to Powell’s words, with stock indexes holding steady and Treasury yields climbing. Investors appear to be resetting their own expectations, with many now predicting the first rate cut in June rather than March.
Powell also addressed concerns about waiting too long to lower rates, like slowing economic growth or a rise in unemployment. But he was confident that the Fed’s current policy stance is finding the sweet spot between shoring up the economy and ensuring price stability.
“We are dedicated to meeting our dual mandate of maximum employment and stable prices,” Powell said. “We will continue to look closely at the data and make policy changes as needed.”
As the Fed looks ahead, Powell’s message is simple: patience is a virtue. With the economy proving resilient and inflation easing, the central bank sees no urgent reason to act quickly on rate cuts.
