US Federal Reserve Chair Jerome Powell said yesterday the central bank is in a “challenging situation” with an ongoing risk of faster-than-expected inflation at the same time that weak job growth has raised concern about the health of the labour market.
In comments prepared for delivery to Rhode Island’s Greater Providence Chamber of Commerce, Powell offered little indication of when he thinks the Fed might next cut interest rates, noting that there was danger to both cutting too fast and risking a new surge of inflation, or reducing rates too slowly and possibly causing unemployment to rise unnecessarily.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation,” Powell said, repeating language used last week when the central bank cut its benchmark rate a quarter of a percentage point. The current rate, in the range of 4 per cent to 4.25pc, is still considered high enough to lean against price pressures in the economy, but “leaves us well positioned to respond to potential economic developments. Our policy is not on a preset course.”
While that phrase is something of a mantra for Fed officials, it has taken on particular resonance now, with strong opinions emerging on both side of the policy divide. Earlier this week several regional Reserve Bank presidents called for caution in further cuts, seeing the balance of risks still tilted towards inflation, while two Fed governors warned that policy is too tight and more cuts needed to protect the job market.
Fed policymakers at the median anticipate quarter-point reductions at the Fed’s October and December meetings, and investors expect with a high probability that they will follow through.
But, “if we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore two per cent inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily,” Powell said.
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