Federal Reserve Chair Jerome Powell stated on Monday that the central bank will not delay cutting interest rates until inflation reaches 2%. Powell made these comments during a speech at the Economic Club of Washington D.C., where he discussed the concept that central bank policies operate with “long and variable lags,” clarifying why the Fed would not wait for the target to be achieved.
Powell explained, “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%.”
Instead of waiting for inflation to hit 2%, Powell mentioned that the Fed is seeking “greater confidence” that inflation will reach the 2% level. He emphasized that this confidence is bolstered by positive inflation data, which has been recently observed.
Regarding the U.S. economy, Powell expressed his belief that a “hard landing” was not a probable scenario. This statement was made during his first public appearance since the consumer price index report for June indicated a decrease in inflation, with prices declining on a monthly basis.
Powell clarified at the beginning of his speech that he was not providing any signals about the timing of potential interest rate cuts by the Fed. The central bank’s upcoming policy meeting is scheduled for the end of July.
During a conversation with David Rubenstein, chairman of the Economic Club of Washington, D.C., and co-founder of The Carlyle Group, Powell shared his insights. The current target range for the federal funds rate is 5.25% to 5.50%, which is higher than 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 across the economy, including mortgage rates. Powell humorously mentioned that people often suggest cutting rates, even strangers in elevators, as he shared an anecdote from that morning.
