At its meeting on Wednesday, the Federal Reserve left the key interest rate at its highest level in more than 20 years, with a range of 5.25 to 5.5 percent.
Several interest rate cuts in 2024 – or none at all
Powell emphasized that arguments for a reduction had already been discussed. At the same time, he remained cautious about the future: He could imagine several interest rate cuts for the rest of the year – or none at all. The Fed will analyze the data and decide from meeting to meeting.
The central bankers have to manage a balancing act. If interest rates are lowered too early or too much, inflation could flare up again, Powell stressed. If, on the other hand, the Fed loosens monetary policy too late or too cautiously, this could weaken the economy and the labor market. This risk is “now real,” said the central bank chief. In recent years, however, the focus has been on rapid inflation.
High interest rates slow down home and car purchases
Commercial banks can borrow central bank money at the Fed’s interest rate. This means that a reduction in interest rates also makes loans cheaper for consumers and companies.
The recent high interest rates have put a brake on purchases of houses and cars. Even when it comes to investments in start-ups, investors have recently become more selective than they were in times of cheap money.
At the same time, in recent months Powell has repeatedly emphasized how dangerous high inflation is because it erodes purchasing power and hits poorer people particularly hard.
The Federal Reserve last lowered the key interest rate in March 2020 – to stimulate the economy during the beginning of the corona pandemic. After that, interest rates initially remained at zero – until the Fed began raising rates at a record pace in March 2022 and raised the interest rate to its current level a year ago.
Economic data becomes more favorable for interest rate cut
In the US, price increases have recently weakened. This gives the Federal Reserve more room to maneuver when it comes to cutting interest rates. At the same time, there are signs that the economy is cooling down in some areas – and could use lower interest rates to stimulate it. There have been some alarm signals in recent months, including in consumer spending – the engine of the US economy.
Many analysts have been thinking for some time that an interest rate cut was likely at the next Fed decision in September. After the interest rate decision, Powell dismissed a journalist’s question about whether a cut of 0.5 percentage points could be as high as that. The Fed is not currently thinking about such details.
Trump: No interest rate cuts shortly before the election
A few months before the presidential election, former President Donald Trump was already trying to politicize interest rate decisions. He claimed that the Fed should not cut interest rates before the election in November because this would improve the mood in favor of the current administration of Democratic President Joe Biden. Trump wants to return to the White House for the Republicans.
Powell assured that the Fed is independent and would never use its power to support or undermine any party or politician.
During his time as US President, Trump nominated Powell for his first term as Fed chairman, but later criticized him for raising interest rates. In an interview in February, he said he would not nominate Powell again.
