The Federal Reserve has been very interested in what buyers think about interest rates. But if the Fed doesn’t think the economy is ready yet, it will not listen to Wall Street’s wish for a rate cut in June.
That was the message that Fed Chair Jerome Powell gave on Friday.
“We don’t need to be in a hurry to cut,” he said, adding that the central bank has more time to wait until inflation is closer to 2% because of the good job numbers.
The Personal Consumption Expenditures price index, which is the central bank’s favorite measure of inflation, came out hours before Powell spoke at an event put on by the San Francisco Fed.
Last month, the measure went up by a small amount to 2.5% yearly, which is further away from the Fed’s goal of 2%. However, Powell wasn’t worried about it because he said it was “pretty much in line with our expectations.”
Then Why Wait to Cut?
Last month’s rise in inflation is a big change from this time last year when prices were rising twice as quickly. Powell did say that he was worried about cutting rates too soon, though.
“If we cut rates too soon, inflation might rise again, and we’d have to raise them again, which would be very bad for the economy,” he said.
He also said that keeping rates as they are now could be dangerous. If the Fed takes too long to cut rates, Americans and the economy could be hurt even more by high-interest rates, which could lead to a recession.
That’s not going to happen right now. “The economy doesn’t feel like it’s being hurt by the current level of rates,” Powell said.
Like Powell, other Fed officials have said they’re more worried about cutting too soon than keeping things the same. Atlanta Fed President Raphael Bostic recently said that the central bank should only cut rates once this year because of the risks of inflation. Bostic is a voting member on the Fed’s rate-setting committee.
Powell finally said that he doesn’t think rates will drop to where they were before the pandemic, which was around 2%, any time soon. The Fed, on the other hand, wants rates to be between 5.25% and 5.5%, which is the highest level in 23 years.
Powell’s next move after leaving the Fed
Powell’s time as head of the Fed ends in two years. It will be interesting to see who is in the Oval Office at that time.
If the presumptive Republican nominee, former President Donald Trump, wins the race, he has said that he will replace Powell. There’s no promise that Powell would want to serve a third four-year term if President Joe Biden, who recommended Powell, is re-elected.
In the end, Powell wants the Fed to stay separate from politics and be a place “that transcends politics,” especially “divisive politics.” Powell said that the Fed will have a hard time — if not impossible — carrying out its duty to keep prices stable and jobs at full capacity if it doesn’t have a clear separation from lawmakers.
Powell said, “I feel accountable and responsible for the institution and to hand it on to the next generation of leaders.”
