Jerome Powell wants to interpret the signs correctly. Only if inflation continues to level off will the Fed chief of the US Federal Reserve plan to lower the key interest rate again. He announced this on Wednesday. In his opinion and that of his colleagues, it is still too early for this. That is why the US central bankers paused interest rates for the fourth time in a row and left the key interest rate at its current level of 5.25 to 5.50 percent. As a reason, they cited the continued high inflation in the USA. This was still 3.4 percent in December and is still above the Federal Reserve’s (Fed) target of two percent.
This is unlikely to ease the pressure on Powell and his colleagues: In order to combat high inflation, they had raised the key interest rate to its highest level in 23 years since the summer of 2022. Nevertheless, the US was spared the recession that usually follows interest rate hikes. In the fourth quarter of last year, the US economy grew by over three percent – more than the economies of most industrialized countries. The American job miracle also continued, even if the number of newly created jobs has not recently increased as rapidly as it did a few months ago.
“We need more evidence that inflation is really falling in the long term”
This has raised expectations for the central bank to cut interest rates. Expectations that Powell dampened for the time being. In December, the Fed promised three interest rate cuts in 2024, without giving a specific date. Powell now reiterated this goal, but remained vague about the timetable. He considers it unlikely that the key interest rate will be cut at the next meeting of the central bankers at the end of March. “We need more evidence that inflation is truly declining on a sustained basis,” Powell said. He and his colleagues still lack the necessary confidence that the trend reversal has been achieved.
Rather, they find themselves in a dilemma: if they lower interest rates too early, they risk a new flare-up of inflation and may even have to raise the key interest rate again. If they delay cutting interest rates for too long, the US economy could end up in a crisis. The American real estate market has already cooled down due to high interest rates. So it’s all about the right timing.
Jerome Powell is part of the caution team. His predecessor, current US Treasury Secretary Janet Yellen, recently predicted a soft landing for the US economy. Despite the high interest rates, the economy has developed surprisingly well, according to not only Yellen’s assessment, but also that of many economists. Powell doesn’t want to know anything about it. It is still too early to declare victory, he emphasized. He does not believe that inflation will return to the record levels of two years ago. But there is a risk that it will remain at its high level.
The timing is also so important because the USA will elect a new president in November. If Americans are still suffering from price increases – or an economic crisis – towards the end of the year, this could jeopardize Joe Biden’s re-election. According to surveys, many voters already have little confidence in Biden’s economic competence and consider Donald Trump to be better qualified in this regard.
In this respect, Jerome Powell may be the decisive man for Biden and his election prospects. The same applies to Donald Trump, who made Powell head of the Fed during his presidency. Biden left the Republican in office in 2021 despite some criticism from his Democratic party colleagues. Powell dodged the question of whether he would seek a third term in office on Wednesday. He said he had more important things to do right now than think about his career.