Fed chair Powell says speculation on U.S. interest rate cuts is premature

Jerome Powell

2nd December 2023 – (Washington) Jerome Powell, the Chair of the U.S. Federal Reserve, cautioned on Friday, that it’s too soon to anticipate when the central bank will commence cutting interest rates, despite the recent strides made in curbing inflation.

The Federal Reserve has implemented assertive measures to control spiralling inflation and has yielded results by decelerating the pace of price increases this year.

Nevertheless, the Fed’s decision to elevate its key lending rate to a 22-year peak, and maintain it there, hasn’t yet succeeded in reducing inflation to its long-term objective of 2%.

Powell reassured that the Fed’s Federal Open Market Committee (FOMC), responsible for setting rates, would persist in its fight against inflation, irrespective of the seeming success of its “restrictive” monetary policy stance.

Addressing an event in Atlanta, Georgia, Powell stated, “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease.” He affirmed the Fed’s readiness to tighten policy further if the situation demands it.

Powell added that the FOMC is proceeding cautiously given the speedy progress made so far, as the risks of under- and over-tightening are becoming more evenly balanced.

Futures traders, based on data from CME Group, attribute an almost 98% probability that the Fed will maintain interest rates for the third consecutive meeting during its next rate decision on 12th – 13th December.

Powell observed that the US economy seems to be decelerating in the final quarter of 2023 and that there is a noticeable slowdown in the previously robust labour market. He remained optimistic that the Fed is on the right trajectory to bring inflation back to 2% without triggering a spike in unemployment.

Achieving a “soft landing” – reducing inflation without plunging into a recession – is a challenging task, but recent indications from the central bank suggest it could be on the right path.

Austan Goolsbee, a fellow member of the FOMC, echoed Powell’s sentiment on Friday, stating that the Federal Reserve is on target to fulfil its dual mandate of managing both inflation and unemployment.

Goolsbee, the President of Chicago Fed, informed a conference in the city, “The employment side is still looking really excellent, and inflation is coming down very rapidly. That’s exactly what we promised and what we want to happen.”

However, Goolsbee cautioned against complacency regarding the challenges ahead, noting that historically, significant reductions in inflation have often required a recession, sometimes a severe one.

Despite this, he remained hopeful, citing the Fed’s success in significantly reducing inflation while keeping the unemployment rate relatively low.