Federal Reserve Chairman Jerome Powell said Monday that the central bank will not wait until inflation reaches 2% before cutting interest rates.
Speaking at the Economic Club of Washington, DC, Powell cited the idea that central bank policy operates on “long and variable lags” to explain why the Fed doesn’t wait until its target is reached.
“That means if you wait until inflation has come down to 2%, you’ve probably waited too long. The tightening that you’re doing, or the amount of tightening that you’ve done, still has consequences that are likely to take inflation below 2%,” Powell said.
Instead, the Fed is hoping for “greater confidence” that inflation will return to the 2% level, Powell said.
“That confidence is being boosted by more good inflation numbers, and we’ve had plenty of those lately,” he said.
Powell also said he thinks a “hard landing” for the US economy is “not a likely scenario.”
Monday was Powell’s first public speech since the June consumer price index report showed inflation was slowing, with prices actually falling month after month.
Powell said early in his appearance that he did not plan to signal when the Fed might start cutting interest rates. The central bank’s next policy meeting is in late July.
Powell made the comments during a conversation with David Rubenstein, president of the Economic Club of Washington, DC, and co-founder of The Carlyle Group, where Powell previously worked.
The target range for the federal funds rate is currently 5.25% to 5.50%. That’s up from a range of 0% to 0.25% during the Covid-19 pandemic and a range of 1.50%-1.75% before that health crisis.
The federal funds rate affects, directly or indirectly, the cost of money throughout the economy, such as mortgage rates.
“People I don’t know are always saying, ‘Hey, lower the rates.’ That’s what someone said in the elevator this morning,” Powell joked.