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Powell Asked To Justify Keeping Rates Above 5%

FED
  • Q: What is the justification to keep rates above 5%?
    • A: Almost every participant on the committee believes it will be appropriate to reduce rates. Inflation is coming down, the labor market is strong; what we are trying to to do is identify a place where we are really confident about inflation getting back to 2% so we can begin dialling back restrictive policy. The median participant wrote 3 cuts this year, but to get to the place where we feel comfortable starting that process, we need confirmation that inflation is coming down sustainably to 2%.
    • In theory, real rates go up as inflation comes down. That doesn't mean we can mechanically adjust policy as inflation comes down. We look at broad financial conditions, but we don't know where the neutral rate is. We don't wait for the economy to turn down, that would be too late. We are managing the risks of moving too soon vs moving too late. Almost everyone on the Committee is in favor of lowering rates this year, but the timing of that will be linked to gaining confidence of inflation heading sustainably to 2%.
  • Q: You pledged to cut rates before inflation reached 2%, when will the statement change from saying inflation remains "elevated"? Would a slide in employment also lead you to cut rates?
    • A: I don't know we worked out the particular statement language. The 12 month core inflation rate is well above that. The case is likely it will continue to come down, but we want to see more data.
    • If we saw an unexpected weakening in the labor market, that would certainly weigh on cutting sooner, absolutely. If we saw inflation stickier/higher, we would argue for moving later.
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