Key Takeaways
- Federal Reserve Chair Jerome Powell said the central bank could lower interest rates if a job market downturn looks like a more serious risk than a surge of inflation.
- The Fed kept its benchmark interest rate steady at its most recent meeting on Wednesday, but could cut it as soon as September if the job market weakens.
- Powell said the Fed would cut if it faced more balanced risks to its two-sided mission of containing inflation while keeping employment high.
No amount of browbeating by President Donald Trump has convinced the majority of central bankers to cut borrowing costs yet—but economic data coming in over the next few months might do the trick.
Federal Reserve Chair Jerome Powell discussed the circumstances under which the Fed would cut interest rates when speaking to reporters in a press conference on Wednesday afternoon. Powell explained why the Fed chose to leave its benchmark interest rate unchanged, and what it might take to shake the central bankers loose from their wait-and-see approach to monetary policy.
The Fed has resisted Trumps demands to cut the federal funds rate, which could put downward pressure on all kinds of loans. Powell said the Fed kept the benchmark rate in a restrictive range of 4.25% to 4.5%, which means the rate keeps borrowing costs high enough to slow the economy and push down inflation without triggering a recession.
Trump has pressured Powell to cut rates because it could reduce the interest the government pays on the ballooning national debt. But Powell has kept his focus on another number entirely: the inflation rate, especially as measured by Core PCE inflation, which the Fed uses as its benchmark to determine if consumer prices are rising at the Feds goal of a 2% annual rate. Core PCE prices rose 2.7% over the year as of May, above the Feds target.
Simply put, in Powells view, inflation is still too high to justify a rate cut.
It’s All About ‘The Balance’
The Fed has a dual mandate from Congress to keep inflation stable while also keeping employment high.
The employment part of the Feds mandate is fine for the moment, according to Powell. The unemployment rate is hovering near historic low levels, while inflation is still too hot for comfort. On top of that, Powell and other Fed officials see a risk that Trumps vast array of new tariffs will push up prices for consumers, potentially setting off more inflation.
In Powells view, the Fed is further from its goal on inflation than its labor market mission, which means the Fed must keep rates high. Change that equation, though, and the Fed could quickly begin to cut interest rates.
Job creation has slowed down in recent months, but the unemployment rate hasnt gone up, partly because Trumps crackdown on immigration has cut down the number of job seekers.
I think youve got downside risks in a world where unemployment is being held down because both demand and supply are declining, Powell said. I think that its worth paying close attention to.
The time for a rate cut could end up being later than many financial market participants had recently hoped. The odds for a September rate cut fell to 45% in the wake of Powells press conference, down from nearly 65% the day before, according to the CME Groups FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
The expectation for this meeting wasn’t a rate cut, and I don’t think there would have been much upside to Powell signaling that one was imminent, Elyse Ausenbaugh, head of investment strategy at J.P. Morgan Wealth Management, wrote in a commentary. The data, as it stands today, isn’t yet calling for one, and a lot could change between now and the FOMC’s next decision point in September.
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