Federal Reserve Chairman Jerome Powell has announced that the central bank will not wait for inflation to reach 2% before cutting interest rates. This statement was made during his speech at the Economic Club of Washington DC Powell explained that the central bank's policy works with “long and variable lags”, indicating that waiting for inflation to reach the target could be too late. The effects of the level of tightness could drive inflation below 2%.
Instead, the Federal Reserve is looking for “more confidence” that inflation will return to the 2% level. Powell noted that confidence is bolstered by good inflation data, which has been seen recently. He also expressed his belief that a “hard landing” for the US economy is not a likely scenario.
This was Powell's first public appearance since June's consumer price index report showed a cooling trend in inflation, with prices actually declining month over month. However, Powell clarified at the beginning of his appearance that he did not imply any signal about when the Fed might start to cut interest rates. The central bank's next policy meeting is scheduled for late July.
Powell's remarks came during a discussion with David Rubenstein, president of the Economic Club of Washington, DC, and co-founder of The Carlyle Group, where Powell previously worked. The current target range for the federal funds rate is 5.25% to 5.50%, a significant increase from the range of 0% to 0.25% during the Covid-19 pandemic and the range of 1.50% to 1.75% before the health crisis. The federal funds rate has a direct or indirect impact on the cost of money throughout the economy, including mortgage rates. Powell humorously mentioned that people often suggest he lower rates, even in casual settings like an elevator ride.
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