Fed needs more confidence in inflation for rate cuts, says Jerome Powell

Washington — The US economy appears nowhere near the point of falling into recession, Federal Reserve chair Jerome Powell said on Wednesday, but he noted it remains unclear when the central bank may cut interest rates and underpin the current expansion given further progress on inflation was not assured.

Appearing before legislators who will face inflation-weary voters this fall, Powell told members of the House financial services committee “there's no evidence, there's no reason to think, that the US economy is in, or in some kind of short-term risk of, falling into recession.”

Far from it, Powell said the Fed was on a “good path” to achieve its hoped-for soft landing in which inflation continues falling to its 2% target while the economy grows and the unemployment rate, currently 3.7%, remains low.

But heading into a charged presidential election year, Powell also shied away from committing to any timetable for rate cuts, acknowledging there were risks the Fed might wait too long to ease monetary policy, and damage the economy, but also that it did not want to ease credit conditions too soon and see inflation reaccelerate.

“We expect inflation to come down, the economy to keep growing,” Powell said. “If that's the case, it will be appropriate for interest rates to come down significantly over the coming years.”

But continued progress on lowering inflation “is not assured,” Powell said, a fact that is keeping Fed officials from committing to any timetable or pace of rate reductions, with price pressures broadly seen as easing yet also some concern that the process of disinflation may stall.

In a hearing that the Republican majority in particular kept focused on bank regulation, members regardless of party largely steered clear of pressing Powell to either cut rates sooner, or delay any monetary easing in order to assure inflation is controlled.

But the context of Powell's testimony, with Fed decisions influencing the economic landscape during a coming rematch between President Joe Biden and former president Donald Trump, was made clear early.

“We're in a political year,” committee chair Patrick McHenry, a North Carolina Republican, said as he opened the hearing quizzing Powell on the central bank's rate cut plans and noting that everything the Fed does would be seen through the “lens” of the November presidential vote.

Investors currently expect an initial rate reduction in June; Fed officials as of December projected three quarter-point cuts over the course of the year, and will update that outlook at a meeting in two weeks.

Rate cuts “really will depend on the path of the economy. Our focus is on maximum employment and price stability, and the incoming data as they affect the outlook, and those are the things we'll be looking at,” Powell said. The Fed “would like to see more data that confirm and make us more confident that inflation is moving sustainably down to 2%” before reducing the policy rate.

Powell in prepared remarks to the House panel said rate reductions will “likely be appropriate” later this year, “if the economy evolves broadly as expected.”

He noted that inflation had “eased substantially” since hitting 40-year highs in 2022, but remained reluctant to say when Fed officials might reduce a benchmark rate of interest that has been held in the 5.25% to 5.5% range, the highest in more than 20 years, since July.

For the constituents of legislators conducting Wednesday's hearing, a high Fed policy rate means elevated interest rates for home mortgages, credit cards and small business loans, which arguably have contributed to Biden's current low approval ratings, even as that tough monetary medicine helps relieve the high inflation that takes its own toll on firms and families.

Recent data has done little to clarify the direction of the economy and inflation, with some analysts projecting price pressures to steadily ease, others anticipating inflation will persist, and investors expecting rate cuts to start in June.

Powell will appear before the Senate banking committee on Thursday.

Powell's testimony comes at a time when inflation is now by some measures within striking distance of the Fed's 2% target, but also as the economy remains unexpectedly strong.

Even as the Fed has kept its policy rate “restrictive”, overall financial conditions have been easing and asset prices rising on expectations of coming rate cuts, a dynamic that could make inflation harder to tame and bolster arguments for further delay.

Since the Fed's January 30-31 meeting, data has accumulated in a tit-for-tat fashion. Reports bolstering the soft-landing narrative, such as encouraging figures on services prices on Tuesday or signs of slowing consumer spending, have been counterbalanced by others showing inflation stuck in significant ways, such as from still-rising shelter costs, or evidence of unexpected economic strength, such as January's outsized gain of more than 350,000 jobs.

Powell has made a point as chair to cultivate ties with Democratic and Republican legislators. That has been aided by his reputation as a centrist with Republican roots who was named a Fed governor by former President Barack Obama, a Democrat, elevated to chair by Trump and then given a second four-year term as chair by Biden.

While the deep US cultural divide over issues like abortion and immigration may dominate the campaign, the Fed's decisions could determine whether the presidential vote occurs in an environment of low inflation, low unemployment and falling interest rates that typically favours an incumbent or in more challenging conditions.

Members of a closely divided but Republican-controlled House all face voters in November. While only some members of the Democratic-led Senate panel are up for re-election, those include chair Sherrod Brown of Ohio, who has already urged Powell to get rate cuts under way given the decline in inflation.

Reuters