Powell: No Rush to Cut Rates as Inflation Eases

Federal Reserve Chair Jerome Powell reiterated Tuesday that the central bank doesn't need to rush into further interest rate cuts, as the economy remains strong and inflation has eased significantly over the past two years. In prepared testimony before the Senate banking committee, Powell acknowledged that inflation has come down but remains somewhat elevated relative to the Fed's 2% longer-run goal.



Powell's comments come as the Fed has been reducing its key interest rate from a two-decade high of 5.3% in 2022 and 2023 to combat a pandemic-induced inflation surge. The Fed's preferred annual inflation measure has fallen from a peak of 5.6% to 2.8% as of August 2024. However, Powell emphasized that the Fed's current policy stance is significantly less restrictive than it had been, and the economy remains sturdy.



The Fed's decision to pause rate cuts and assess the economy's progress aligns with historical disinflationary periods, particularly those characterized by high-commitment disinflation attempts by the Federal Open Market Committee (FOMC). In a study by Romer and Romer (2024), it was found that inflation tends to decline when the FOMC expresses a high commitment to disinflation. The current Fed policy stance reflects a similar commitment to maintaining a strong economy while keeping inflation in check.

Powell also noted that labor market conditions have cooled from their formerly overheated state, with payroll gains averaging 189,000 a month over the past four months and the unemployment rate at 4% in January 2025. This multifaceted approach to addressing inflation aligns with the Fed's dual mandate of maintaining stable prices and maximum employment, ensuring that the economy remains on a solid footing while inflation continues to decline.



Investors should closely monitor key economic indicators, such as inflation measures (PCE Price Index and Consumer Price Index), labor market indicators (unemployment rate and average hourly earnings), GDP growth, housing market indicators (housing starts and building permits), and financial market indicators (Treasury yields and stock market performance), to anticipate future rate decisions by the Federal Reserve. By staying informed about these indicators, investors can better position their portfolios to adapt to changes in monetary policy.

In conclusion, Powell's comments reflect the Fed's commitment to a data-dependent approach, with a focus on maintaining a strong economy while keeping inflation in check. As the economy continues to evolve, investors should closely monitor key economic indicators to anticipate future rate decisions and adjust their portfolios accordingly.