Federal Reserve Chairman Jerome Powell is keen to shield himself from the crossfire of political pressures at a turning point for the US economy. Powell last week — in unusual fashion — recalled the importance of central bank independence. in a special section of its monetary policy report. He will maintain this position on Tuesday in the Senate and on Wednesday in the House of Representatives. And this independence means, among other things, lowering or not lowering interest rates before the presidential elections on November 5th based on the economy, and not on politics. The president of the central bank has declared that he is waiting for “more positive data” before acting.
“The Federal Reserve has stated that it does not believe it is appropriate to lower the target range for the federal funds rate until we have increased confidence that inflation is moving sustainably toward 2%,” Powell said in his opening statement. “Data for the first quarter of this year did not support that increased confidence. However, the most recent inflation readings have shown modest further progress, and further positive data would reinforce our confidence that inflation is moving sustainably toward 2%.”
Investors are eagerly awaiting the June inflation data, which will be released on Thursday. The latest employment data, although somewhat contradictory in themselves, paint a general picture of a cooling labor market. The economy has also slowed its growth and the extraordinary savings accumulated during the pandemic have evaporated. If prices help a little, as they did in May, the Federal Reserve would be willing to lower rates at the last meeting of the summer, on September 17 and 18. Market prices They grant a probability of more than two thirds to that scenario.
Interest rates are at a 23-year high, in the 5.25%-5.5% range. In their latest forecasts, Fed policymakers had been calling for a single 0.25-point rate cut by the end of the year, but a few still expected two cuts. Powell repeatedly reaffirms that it will depend on the data.
The central banker has reviewed the labor market, concluding that a broad set of indicators suggests that conditions are more or less back to where they were on the eve of the pandemic: strength, but not overheating. As for inflation, after the lack of progress towards the 2% target in the first part of the year, “the most recent monthly readings have shown modest further progress.” Long-term inflation expectations appear to remain well anchored.
In that context, Powell has said that meetings will be taken meeting by meeting. No one expects a move at the end of this month, but perhaps at the next one. “We know that reducing monetary restriction too soon or excessively could stall or even reverse the progress we have seen on inflation. At the same time, in light of the progress made both in reducing inflation and in cooling the labor market over the past two years, rising inflation is not the only risk we face. Relaxing monetary policy too late or too little could unduly weaken economic activity and employment,” he said. “When considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing new data and their implications for the evolution of the outlook, the balance of risks, and the appropriate path of monetary policy,” he reiterated.
His opening statement ended with a reminder of the Federal Reserve’s statutory operational independence. Lawmakers will question Powell about his plans.
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