Federal Reserve Chair Jerome Powell announced on Monday that the central bank will not wait until inflation reaches 2% before cutting interest rates. Speaking at the Economic Club of Washington, D.C., Powell highlighted that the effects of central bank policy have “long and variable lags,” explaining why waiting for the exact target could be counterproductive.
“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 stated.
The Fed aims for “greater confidence” that inflation will return to the 2% level before making rate cuts. Powell mentioned that recent positive inflation data has been encouraging.
He also expressed optimism about the U.S. economy, stating that a “hard landing” is not a likely scenario.
This marked Powell’s first public appearance since the June Consumer Price Index report indicated cooling inflation, with prices decreasing month over month. At the start of his talk, Powell clarified he did not intend to signal any specific timing for rate cuts. The next Federal Reserve policy meeting is scheduled for the end of July.
Powell’s remarks were part of a discussion with David Rubenstein, chairman of the Economic Club of Washington, D.C., and co-founder of The Carlyle Group.
Currently, the federal funds rate target range is 5.25% to 5.50%, up from 0% to 0.25% during the Covid-19 pandemic and 1.50% to 1.75% before the health crisis. This rate influences the overall cost of money in the economy, including mortgage rates.
Powell humorously noted the public’s frequent calls for rate cuts, mentioning, “People I don’t know will always say, ‘hey, cut rates.’ Somebody said that in the elevator this morning.”