Jerome Powell, the Chair of the Federal Reserve, stated that overly aggressive easing of the federal funds rate could impact efforts to control inflation. This statement comes about a week after the Fed implemented a rate cut for the first time this year following their monetary policy meeting, suggesting a cautious approach to further rate cuts and their magnitude.
In a speech at the Rhode Island Chamber of Commerce, Powell mentioned that “in the short term, inflation risks are leaning to the upside, while employment risks tilt to the downside—a challenging situation.” He added, “When these dual risks exist, there is no risk-free option.”
He also noted, “If we ease rates too aggressively, we could leave our efforts to control inflation incomplete and may, later on, need to switch back to raising rates to restore the 2% inflation target.” At the same time, Powell warned, “Maintaining tight policy for too long could unnecessarily shrink the job market,” highlighting the potential drawbacks of keeping rates high for an extended period.
He emphasized that “when the goals of price stability and maximum employment are in tension, the Fed’s policy framework has required balancing between the two objectives.” Powell explained that as downside risks to employment increased, there was a shift in risk balancing, which was the rationale behind the Fed’s recent rate cut decision.
On the 17th, the Federal Open Market Committee (FOMC) meeting decided to lower the federal funds rate from 4.25-4.50% to 4.00-4.25%, marking the first cut in nine months since December last year, when the rate was decreased by 0.25 percentage points. Powell commented on this decision, saying, “This policy stance is still somewhat restrictive in my view, placing us in a good position to respond to potential economic changes.”
He emphasized that “our policy is not on a predetermined path” and that “the Fed will continue to determine the appropriate policy stance based on incoming data, evolving outlooks, and risk balancing.” Powell reaffirmed the Fed’s commitment to supporting maximum employment and sustainably aligning inflation with the 2% target.
Powell pointed out that “recently, inflation has risen and remains somewhat elevated,” and noted that “recent data and surveys indicate that these price increases are more influenced by tariffs than by overall inflation pressures.” While suggesting that tariff-induced price increases may be short-lived, he cautioned that “tariff increases could take some time to ripple through the supply chain.”
As a result, he predicted that “one-off price increases could spread over several quarters, manifesting as moderately high inflation during that period.”
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