Federal Reserve chairman Jerome Powell acknowledged the growing uncertainty in the context of the prospects for the subsequent dynamic of the United States economic system but at the same time, he noted that currently there is no need for officials to rush to adjust monetary policy.
On Friday, March 7, in New York, during a speech at an event hosted by the University of Chicago Booth School of Business, Mr. Powell said that despite the elevated level of uncertainty, the US economy continues to be in a good place. According to him, nowadays the central bank of the United States does not face the need to rush to make monetary policy changes in the context of interest rates. He also noted that the US financial regulator has every opportunity to wait for more clarity.
Jerome Powell stated that it is still unknown exactly what consequences the economic plans of the President of the United States Donald Trump will have, including for the processes in the trade area and the situation in the immigration sector. According to him, despite the developments in some of the mentioned areas, especially in trade policy, uncertainty about these actions and their likely implications continues to be high.
Jerome Powell stated that recent data suggests that consumer spending in the United States may moderate. The Fed chairman also noted that a survey of households and businesses pointed to heightened uncertainty about the future vector of the dynamic of the US economic system.
Mr. Powell said that it remains to be seen what impact the current developments will have on future spending and investments.
After the Fed chairman’s comments, US government bond yields rose to their highest level of the day. The rates on debt of all maturities also showed a moderate increase. Prior to this, yields tumbled, which was because traders perceived the jobs report published on Friday as confirmation of expectations of several interest rate cuts in the United States in the current year.
Jerome Powell also stated that he expects further progress in reducing inflation. At the same time, in his opinion, the relevant process will be uneven. In this context, he noted that the path to a steady return of inflation to the Fed’s 2% target has been bumpy, and the financial regulator expects this to continue. According to him, the central bank of the United States sees ongoing progress in categories that remain elevated, such as housing services and the market-based components of non-housing services.
Moreover, on Friday Jerome Powell drew attention to data indicating an increase in near-term inflation expectations of consumers. In this context, he noted that most long-term measures remain stable and are consistent with the Fed’s 2% target.
Currently, expectations are actively circulating that at the next meeting of the central bank of the United States, which is scheduled for March 18-19, policymakers will decide whether to keep the key policy rate unchanged. It’s worth mentioning that in the last months of 2024, the cost of borrowing in the US was lowered by a full percentage point. Officials of the central bank of the United States have unequivocally signaled their willingness to continue to stand pat in the framework of making decisions on monetary policy easing. In this case, they note their desire to make efforts to ensure that the Fed’s 2% inflation target becomes a fact of objective reality in the space of the US economic system. The current uncertainty could potentially generate a configuration of the state of affairs that would be a blow to the mentioned efforts. At the same time, so far this is a theoretical probability and not something that can be described as an inevitability in a practical sense.
In the context of forecasting, policymakers tend to refrain from making any more or less detailed comments. The corresponding position is associated with significant uncertainty about Donald Trump’s economic proposals. He slapped new tariffs on goods imported from China. At the same time, Mr. Trump seesawed on the specifics of plans to impose levies on Mexico and Canada. Moreover, the US president has promised retaliatory tariffs for many of Washington’s other trading partners, while pursuing tougher immigration enforcement and an increase in the number of migrant deportations.
The mentioned actions within the framework of the combined effect may put upward pressure on inflation. This will also mean weighing on overall economic growth. Against the background of the mentioned prospects, it is likely that at some point the Fed will face the implementation of a scenario involving a slowdown in growth with elevated inflation.
Jerome Powell stated that it is the net effect of these policy changes that will matter for the economy and for the path of monetary policy. He stated that as the Fed parses the incoming information, officials are focused on separating the signal from the noise as the outlook evolves.
During the Q&A session, Jerome Powell underlined that the officials of the central bank of the United States are not increasing the risks by being patient. He also stated that the costs of being cautious are very, very low. According to him, the cost of inaction may rise if inflation expectations are clearly under pressure.
Jerome Powell also answered a question about the Commerce Department’s decision to abolish committees that advise the statistical agency responsible for compiling vital United States economic data such as gross domestic product (GDP) and the Fed’s preferred inflation gauge. In this context, he stated that the government-gathered data the financial regulator gets from the Bureau of Economic Analysis and the Bureau of Labor Statistics is incredibly important, and really the gold standard for data. According to him, the ability to track what is happening in the economy is very important, and this is something that the United States has been leading in for a long time and should continue to lead in. This statement does not contain a direct, literal assessment of the actions, but at the same time, it is definitely not ambiguous.
