Federal Reserve Chair Jerome Powell stated that there is no need for the Fed to rush into interest rate cuts. He emphasized that the economy is “overall strong,” the labor market is “firm,” inflation is easing, although it remains higher than the Fed’s 2% target.
On Tuesday, February 11th, Powell attended the semi-annual monetary policy hearing of the Senate Banking, Housing, and Urban Affairs Committee. In his prepared remarks, he reiterated, “Given the current policy stance remains restraining and the economy is strong, we do not need to adjust policy hastily.”
Powell’s remarks echoed those of the previous month’s press conference. At that time, the Fed decided to maintain the federal funds rate unchanged after its policy meeting, ending a three consecutive rate-cutting agenda. The Fed has raised rates by a total of 525 basis points from March 2022 to July 2024, and subsequently cut rates by a total of 100 basis points after three consecutive policy meetings starting in September 2024.
The Fed’s preferred inflation gauge has decreased from its peak of 5.6% to 2.8%.
Powell noted that inflation has significantly declined over the past two years but still remains “somewhat above” the Fed’s 2% long-term target. He also stated, “The overall economy is strong, and we have made significant progress towards achieving our goals over the past two years. Labor market conditions have cooled off from previous overheated levels.”
Against this backdrop, the Fed remains patient in adjusting interest rates and emphasizes the risks of cutting rates too quickly or too slowly. Powell stated that future rate adjustments will be based on economic data, outlooks, and risk assessments.
“If policy restraint is removed too quickly or too much, it may hinder the progress of inflation decline; conversely, if the reduction is too slow or too small, it may excessively disrupt economic activity and employment,” Powell said.
Following the COVID-19 pandemic, the U.S. job market has been under pressure due to labor shortages, with employers raising wages to attract workers amid supply chain issues, exacerbating inflation.
However, the Fed believes that the labor market has remained healthy. Over the past four months, the U.S. has added an average of 189,000 jobs per month, with the unemployment rate dropping to 4% in January, the lowest level in eight months.
Regarding the job market, Powell stated, “Overall, indicators show that the labor market is generally balanced and is not a major source of inflation pressure.”
In December of last year, Fed officials predicted two interest rate cuts for this year, lower than the four predicted in September. Market expectations align with this forecast, with the Fed not expected to cut rates at its mid-March meeting.
Powell emphasized that the Fed’s policy will remain flexible to address changes in economic conditions. He stated, “If the economy remains strong and inflation does not trend closer to 2%, we could maintain restrictive policies for a longer period. But if the labor market unexpectedly weakens, or if inflation declines faster than expected, we can loosen policy accordingly.”
Powell noted that the Fed will regularly review its monetary policy but will not consider changing the 2% inflation target.