Jerome Powell, Chairman of the Federal Reserve, has surprised the market by declaring that policymakers will not wait for inflation to fall to 2% before cutting interest rates. ‘If you wait until inflation hits 2%, you've probably waited too long,’ Powell told the Economic Club in Washington D.C.
Powell stressed that Fed officials are looking for additional evidence that high inflation is under control before cutting rates. ‘We want to have greater confidence that inflation is coming down to our 2% objective on a sustained basis,’ he said. He added that recent inflation data was encouraging.
At their last meeting in May, Fed officials voted to keep interest rates between 5.25% and 5.5%, their highest level since 2001. Although policymakers left the door open to rate cuts later this year, they stressed the need for ‘greater confidence’ in falling inflation before changing policy.
Since that meeting, there have been signs that inflation is beginning to moderate. May's Personal Consumption Expenditure Index showed that inflation had slowed to 2.6%, from a peak of 7.1%. Core prices, watched closely by the Fed, also rose by 2.6%, the slowest annual rate since March 2021.
Most investors now expect the Fed to start cutting rates in September or November, with only two cuts expected this year. This is a radical change from the start of the year, when they were expecting six cuts as early as March.
Powell did not dispute these expectations and stated that he believes a ‘hard landing’ is unlikely. Higher interest rates mean higher rates for consumer and business loans, which slows the economy by forcing employers to cut back on spending. 30-year mortgage rates have exceeded 8% for the first time in decades, and borrowing costs for home equity lines of credit, car loans and credit cards have also risen.
High interest rates are having a significant impact on lending to consumers and businesses. 30-year mortgage rates have broken through the 8% barrier for the first time in decades. Borrowing costs for home equity lines of credit, car loans and credit cards have also risen, putting additional pressure on borrowers and slowing the economy.
