Powell Signals Cautious Approach to Rate Cuts

Federal Reserve Chair Jerome Powell assured Congress that the U.S. economy’s robust performance allows the Fed delays rate cuts. He emphasized that the Fed’s goal remains to curb inflation, with current rates considered appropriately set for the moment.

Fed Holds Interest Rates Steady After Recent Cuts

In 2024, the Fed made significant rate cuts in the latter half of the year, reducing rates by one percentage point over its final three meetings. This follows a period of maintaining rates at levels not seen in two decades, as the central bank adjusted its strategy to ensure economic stability.

Stable Labor Market Signals Potential for Longer Rate Hold

The labor market, which had shown signs of slowing down in mid-2024, has stabilized. Unemployment briefly rose but has since dropped back to 4.0%. Powell hinted that the Fed might hold rates at current levels for an extended period if inflation continues to decline toward its 2% target and the economy remains steady.

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Inflation Reports Inspire Optimism but Risks Remain

Recent inflation reports have been encouraging, with inflationary pressures showing signs of easing. This brings the Fed closer to its target, but Powell cautioned that policy changes under the Trump administration, particularly concerning tariffs, could disrupt inflation control efforts.

Long-Term Interest Rates: Investor Concerns and Fed Influence

While the Fed controls short-term interest rates, long-term rates have remained stable. Powell pointed out that these rates are less affected by Fed policy and more influenced by investor concerns over budget deficits and potential inflation risks, highlighting the broader market’s role in shaping economic outcomes.

Economic Resilience Amid Rate Hikes

The economy has shown resilience despite the Fed’s aggressive rate hikes starting in 2022, aimed at curbing inflation. Strong consumer spending and high asset prices, fueled by past stimulus measures, have helped the economy weather tighter policies. Inflation has dropped significantly from a 2022 peak of 7.2% to 2.6% by the end of 2024.

Uncertainty Over Future Fed Moves

Powell emphasized the Fed’s current approach focuses on controlling inflation, but future rate cuts depend on economic changes. The central bank’s decisions will rely on inflation patterns and labor market shifts. Flexibility remains key for adjusting to evolving economic conditions. Rate cuts are possible if inflation trends and labor market dynamics warrant action.

The Fed delays rate cuts signals a cautious approach, prioritizing inflation control. Powell’s statement suggests confidence in the current economic balance, with rates considered suitable for maintaining stability and growth, according to wsj deals.