Federal Reserve Chair Jerome Powell, Speaking at the Economic Club of Washington D.C. on Monday, said that the central bank will not wait for inflation to hit the 2% target before cutting interest rates.
Won’t Wait: Powell emphasized the concept of “long and variable lags” in central bank policy to explain this approach. “The implication of that is that if you wait until inflation gets all the way down to 2%, you’ve probably waited too long, because the tightening that you’re doing, or the level of tightness that you have, is still having effects which will probably drive inflation below 2%,” Powell said.
Confidence: Instead of waiting for the 2% mark, Powell stated that the Fed is looking for “greater confidence” that inflation will trend toward this level. He pointed out recent positive inflation data as a factor in this decision-making process. “What increases that confidence is more good inflation data, and lately here we have been getting some of that,” he noted.
Soft Landing: Powell also addressed concerns about the U.S. economy, expressing optimism about avoiding a severe downturn. He stated that a “hard landing” was not “a likely scenario,” offering some reassurance amid ongoing economic uncertainties.
This approach signals a shift in the Fed’s strategy, highlighting its adaptive stance in response to economic indicators rather than rigidly adhering to set targets. The decision to potentially cut rates before reaching the 2% inflation goal reflects a nuanced understanding of the lagging effects of monetary policy on the economy.
