In a clear signal that interest rate cuts may be on the horizon, Federal Reserve Chair Jerome Powell indicated the central bank won't wait for inflation to actually hit its 2% target before starting to lower rates.
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Speaking at the Economic Club of Washington D.C. on Monday, Powell referenced the well-known concept that monetary policy works with "long and variable lags." This means by the time inflation hits 2%, the Fed's current tight policy stance would have already pushed prices below that level.
"The implication of that is that if you wait until inflation gets all the way down to 2%, you've probably waited too long," Powell explained, "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%."
Instead of waiting for 2% to be achieved, the Fed chair said the central bank is looking for "greater confidence" that inflation is solidly on path back to that target. And Powell suggested recent cooling price data has increased that confidence, stating "lately here we have been getting some of that."
The remarks were Powell's first public comments since the June CPI report showed prices actually declining 0.1% month-over-month, building on growing disinflation trends. They seem to confirm market expectations that the Fed will likely start cutting rates before year-end to prevent an overcorrection that squashes inflation completely.
Powell also pushed back on "hard landing" recession fears, saying such a scenario is "not a likely" outcome for the U.S. economy currently. The next Fed policy meeting is July 25-26, when updated economic projections and potential hints about the rate path will be released.
For now, the federal funds rate remains sharply elevated in the 5.25%-5.5% range after over a year of aggressive rate hiking by the Fed to combat the worst inflation in 40 years. While a pause is expected this month, Powell's latest comments increase the odds of rate cuts arriving sooner than many anticipated just a few months ago.
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