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The Federal Reserve is “not far” from having the confidence to start cutting interest rates, its chair Jay Powell has said, bolstering hopes that the central bank will lower borrowing costs in the coming months.
Powell told US senators on Thursday that the Federal Open Market Committee was “in the right place” on monetary policy while it waited for proof that almost two years of higher rates had tamed inflation.
“We’re waiting to become more confident that inflation is moving sustainably to 2 per cent,” the Fed chair said, referring to the central bank’s official inflation target. “And when we do get that confidence, and we’re not far from it, it will be appropriate to dial back the level of restriction so that we don’t drive the economy into recession.”
Powell’s comments will add to hopes the Fed is at last preparing to ease monetary policy after months of holding rates at a 23-year high of between 5.25 per cent and 5.50 per cent — part of its quest to quell price pressures that surged as the US economy emerged from the pandemic.
Futures prices imply investors have priced in a quarter-point cut by July, with many betting the move will actually come in June.
The personal consumption expenditures prices index, the headline inflation gauge used by the Fed to measure progress against its 2 per cent target, is now at just 2.4 per cent, having hit a high of 7 per cent in 2022.
Powell was speaking in Washington just hours after European Central Bank president Christine Lagarde signalled the central bank could begin lowering interest rates in June.
Stocks and bonds were both higher on Thursday, with the S&P 500 up 1.2 per cent while yields on rate-sensitive two-year Treasuries hovered around three-week lows at 4.52 per cent.
The Fed’s rate-setters next meet on March 20, when the FOMC is widely expected to keep interest rates on hold. The Fed will also unveil a new so-called “dot plot”, detailing how many times officials think the central bank will cut rates in 2024.
Analysts have forecast the Fed will make three or four cuts over the second half of 2024.
The continued strength of the US economy has defied many forecasters and allowed the Fed to take a cautious approach to cutting rates, confident that higher borrowing costs will not trigger a sharp rise in unemployment.
“We’re doing the best of anybody,” Powell said. “We’ve got the strongest growth and the lowest inflation of the advanced economies.”
The US’s nearest economic rival in terms of the size of total gross domestic product, China, was having “significant difficulties”, he added.
The ECB on Thursday also downgraded its growth forecasts for the fourth time in a row, saying it expected the eurozone economy to expand 0.6 per cent this year, compared with the previous estimate of 0.8 per cent. Many economists expect the to Fed upgrade its US GDP projections at the March vote.
Additional reporting by Jennifer Hughes in New York