On Wednesday, U.S. Federal Reserve Chair Jerome Powell told lawmakers that he and his colleagues would “keep our heads down” in a charged presidential election year, with interest rate cuts likely in coming months if inflation falls.
Rate reduction "depend on the economy. We'll focus on maximum employment, price stability, and incoming data as they affect the forecast "Powell told the House Financial Services Committee. "We are just going to keep our heads down and do our jobs and try to deliver what the public is expecting from us."
Powell said rate cuts will "likely be appropriate" later this year "if the economy evolves broadly as expected" and authorities gain confidence in inflation's steady decrease in his prepared remarks to the House panel. While inflation "is not assured," Powell said the economy was clear of imminent recession concerns with a low 3.7% unemployment rate, broad growth, and an expectation that inflation will continue to fall.
We're aiming for that economy. We're on track to get there "Powell added. However, the decision of when and how much to lower the benchmark interest rate is complex in an economy showing signs of continued disinflation but also unexpected strength and consequential in the upcoming rematch between Democratic incumbent President Joe Biden and Republican former President Donald Trump.
"We're in a political year," North Carolina Republican and committee chairman Patrick McHenry said as he opened the meeting by questioning Powell on the central bank's rate lowering intentions and that whatever the Fed does will be seen through the "lens" of the November presidential elections.
At a meeting in two weeks, Fed officials will update their December forecast of three quarter-point cuts over the year, which investors expect to begin in June. Though Fed officials like to say delaying decisions from one meeting to the next doesn't hurt the economy, Powell reiterated that the Fed sees competing risks ahead: failing to cut rates soon enough and damaging the economy, and easing credit conditions too soon and fueling inflation. The Fed's debates might affect Biden's approval ratings and economic management, as well as whether he enters the campaign with low inflation, unemployment, and interest rates.
The current benchmark rate, unchanged at 5.25% to 5.5% since July, was "likely at its peak." Powell said further rate hikes were unlikely. "The bar for additional tightening is relatively high," said Oren Klachkin of Nationwide. "Only a string of stronger-than-expected economic reports, mainly on the inflation and jobs front, would convince policymakers that tighter policy is warranted."
However, asset prices have been rising, financial conditions have improved despite the Fed's tight policies, and Powell's colleagues have been talking of "exuberance" in the economy that might revive price pressures. Eleven of 12 Fed regions reported constant or increased economic growth in the latest Beige Book, bolstering the already strong outlook. Powell and his colleagues seem inclined to delay rate cuts as long as the economy is robust.
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