Fed's Powell: Strong economy means no hurry to cut rates
By Howard Schneider
WASHINGTON (Reuters) -The U.S. Federal Reserve is in no rush to cut its short-term interest rate again given an economy that is "strong overall," with low unemployment and inflation that remains above the Fed's 2% target, Fed Chair Jerome Powell said in opening remarks prepared for delivery at a Senate Banking Committee hearing.
"The economy is strong overall and has made significant progress toward our goals over the past two years," Powell said, with a 4% jobless rate considered around the level of full employment, and inflation lower though still more than half a percentage point above the Fed's target.
"We do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation," Powell said, reiterating language used after the Fed at its January meeting held interest rates steady and indicated further cuts would hinge on inflation declining and the job market remaining healthy.
Referenced only obliquely in Powell's opening remarks were the "risks and uncertainties" the economy faces as the new Trump administration imposes broad new import taxes on some countries and industrial goods, deports immigrants that have been a source of recent labor force growth, and contemplates tax and regulatory reforms.
"We are attentive to the risks to both sides of our dual mandate," Powell said in reference to the Fed's congressionally established goals of stable inflation and maximum employment. "Policy is well positioned to deal with the risks and uncertainties that we face."
Powell's Senate testimony is the first of two days of hearings on Capitol Hill that come as the Fed grapples with how policies enacted and expected from President Donald Trump impact an economy that, by many metrics, is already performing well.
STEPPING CAREFULLY
Powell and other Fed officials are always careful to sidestep judgment about the wisdom of executive branch or congressional actions, keeping their focus on how the economy changes as a result.
But given where the economy stands and the extent of what Trump seems to intend, the premium at the Fed for now is to go slow and hope nothing breaks.
Following his testimony to the Senate Banking Committee on Tuesday, Powell will appear before the House Financial Services Committee at 10 a.m. EST (1500 GMT) on Wednesday.
Both panels are now under Republican control with new chairs. While Powell has made it a priority in his nearly seven years as Fed chair to develop close ties on Capitol Hill, there will be plenty for senators and representatives of both parties to question him about.
Inflation has fallen and is expected to continue doing so, but some recent consumer surveys have shown the public potentially becoming skeptical, a particular problem for the Fed if that continues.
The possibility of steep tariffs on close trading partners like Mexico and Canada and on core industrial products like steel and aluminum has triggered debate over the ways in which such import taxes would or wouldn't cause generalized inflation.
The administration hasn't rolled out a detailed tax, spending and deregulation plan yet, but coming negotiations over those issues could have a large influence on the economy's performance.
Meanwhile, the Fed is facing turnover in one of its key positions with the resignation of Michael Barr as vice chair for bank supervision and regulation and the eventual appointment by Trump of a replacement, with potentially major changes coming in oversight of the financial sector.
For now, investors have read recent data, and in particular the January employment report showing the jobless rate falling to 4% and a strong pace of wage increases, as arguing for fewer Fed rate cuts this year. Markets still anticipate a quarter point reduction in the central bank's policy rate in June, but have begun pricing out any other moves this year.
The Fed at its January meeting held the policy rate steady in the 4.25% to 4.5% range after cutting a full percentage point in the last three meetings of 2024.
"We expect Powell will largely reiterate the message from the January FOMC meeting that with a strong economy, solid labor market, and bumpy progress on inflation, the Fed is not in a hurry," Deutsche Bank economists wrote in a preview of the week's hearings. "Recent tariff announcements have also strengthened the case for patience, as uncertainty around and upside risks to inflation appear more elevated."