“The recent data have clearly not given us greater confidence, and instead indicate it’s likely to take longer than expected to achieve that confidence,” Powell said at a panel discussion on the Canadian and U.S. economies Tuesday.
Plus, the rest of the economy has stayed remarkably resilient as interest rates climbed to the highest rate in decades. The job market continues to grow at a surprising clip. And that means the Fed can stay focused on zapping inflation, without worrying that its fight is eroding business’ willingness or ability to hire, or people’s ability to find stable jobs. Put together, the data on inflation and jobs mean it is “appropriate to allow restrictive policy further time to work,” Powell said.
The message was echoed earlier in the morning by Powell’s No. 2. In a speech, Fed Vice Chair Philip Jefferson said that if upcoming data suggests inflation is “more persistent” than he expects, it would make sense to keep rates higher for longer.
Powell and Jefferson did not get specific on the timing of upcoming cuts or exactly how many there will be. Last month, when central bankers sketched out their expectations for the path ahead, they penciled in three cuts before the end of the year.
But Fed watchers and the financial markets are now questioning not just when cuts will happen, but also if the Fed will be able to eke out even one or two cuts. The outlook shifted considerably last week after March inflation data came in hotter than expected, cementing fears that a new trend had taken hold.
Now that Fed officials have gotten three months of disappointing news, economists assume they’ll need as much encouraging news — at the very least — to put them back on track to cut rates. That means even the most optimistic scenarios don’t include a cut before late summer.
“There’s absolutely, in my mind, no urgency to adjust the policy rate,” San Francisco Fed President Mary Daly said last week. “Policy is in a good place right now, and I need to be fully confident that inflation is on track to come down to 2 percent — which is our definition of price stability — before we would consider a rate cut.”
As a result, the Fed could end up cutting rates in the immediate run-up to the presidential election, just as President Biden and former president Donald Trump are trying to drive home their economic agendas. The Fed tries to avoid politics at all costs, and its leaders say their decisions won’t be influenced by the political calendar. But the closer an initial cut gets to November, the more fraught experts expect the pivot to be.
