- US Federal Reserve Chair Jerome Powell remains on a wait-and-see approach when it comes to interest rate adjustments.
- The central bank head emphasized that modifications in the rate will only happen once the numbers move sustainably closer to the 2% target.
- This comes amid the expected rate cuts by June.
No Interest Rate Cuts Yet
US Federal Reserve Chair Jerome Powell and his colleagues believe that the current inflation and unemployment rates may warrant further discussion before adjusting the interest rate. His statement came amid the rising expectations of a rate cut by June.
According to Reuters, the official’s recent speech at the Stanford Graduate School of Business revealed that “readings on both job gains and inflation have come higher than expected.” Despite his optimism for a rate cut this year, he reminded that it could only happen once they “have greater confidence that inflation is moving sustainably down” to their 2% goal.
Interest rates have stagnated at 5.25%-5.50% since July last year. The change was made in response to the 3% annual inflation rate at that time, but Powell has been keen on cutting the numbers down when inflation slows to 2%.
Last month’s report indicated a 3.2% spike in inflation compared to January’s 3.1%, moving the figures further away from the Fed’s soft landing target. Nonetheless, it sees some form of recovery in certain sectors that may help quell the rising prices later.
What’s with the 2% Target?
While Powell sees 2% as the Goldilocks zone, some critics are now saying that the benchmark should be raised given the evolving nature of the economy. So what was his basis for it?
Based on Time, there was no benchmark for interest rate adjustments until 2012 during the tenure of then-Chair Ben Bernanke wherein he placed the 2% as a basis. This mirrored the move of several central banks in the 1990s that decided to adopt New Zealand’s criterion of a sustainable and healthy level of inflation.
However, analysts and even the Fed back in 2021 agreed the target may be based on “extremely shaky foundations” that could potentially “lead to serious policy errors.” This also reflected the Reserve Bank of Australia’s (RBA) point of contention stating the existing target heavily relied on the premise that the inflation expectations of the people are key factors in the determination of inflation.
The 2% reference is grounded on the concept of a behavior referred to as “inflation psychology.” But then again, this could prove to be troublesome if it results in a scenario where if one expects a product or service may cost more later on, that individual may either demand a higher wage or hoard a product, which could result in higher demand if it would mirror the act of the consensus. This could end up causing higher inflation than what was initially thought of.