JPMorgan Asset Management Chief Market Strategist Gabriela Santos analyzes the Federal Reserve’s decision making on ‘The Claman Countdown.’
Federal Reserve Chair Jerome Powell said Monday that policymakers will not wait until inflation falls to 2% in order to cut interest rates.
“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%,” Powell said at the Economic Club of Washington D.C.
The Fed chief reiterated that policymakers are looking for additional evidence that high inflation is conquered before they pivot to reducing rates.
“We want to have greater confidence that inflation is moving sustainably down toward our 2% target,” he said. “What increases that is more good inflation data. And lately, we have been getting some of that.”
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The Marriner S. Eccles Federal Reserve Board Building is seen on September 19, 2022 in Washington, DC. ((Photo by Kevin Dietsch/Getty Images) / Getty Images)
Officials voted at their most recent meeting in May to hold interest rates steady at a range of 5.25% to 5.5%, the highest level since 2001. Although policymakers left the door open to rate cuts later this year in their post-meeting statement, they also stressed the need for “greater confidence” that inflation is coming down before easing policy.
Since then, there has been some evidence that inflation is starting to ease again. The May personal consumption expenditures index showed that inflation had cooled to 2.6%, from a high of 7.1%. At the same time, core prices – which are more closely watched by the Fed because they strip out volatile measurements like food and energy – also climbed 2.6%, the slowest annual rate since March 2021.
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Most investors now expect the Fed to begin cutting rates in September or November and are penciling in just two reductions this year – a dramatic shift from the start of the year, when they anticipated six rate cuts beginning as soon as March.
Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., on May 1, 2024. (Photo by Liu Jie/Xinhua via Getty Images / Getty Images)
Powell did little on Monday to push back against those expectations. He also said that he thinks a “hard landing” scenario is unlikely.
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Higher interest rates tend to create higher rates on consumer and business loans, which then slow the economy by forcing employers to cut back on spending. Higher rates helped push the average rate on 30-year mortgages above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
