At the ECB Forum on Central Banking, Federal Reserve Chair Jerome Powell emphasized a careful approach Tuesday to potential interest rate cuts and stressed the critical issue of the United States' unsustainable debt path.
Speaking on a panel with ECB President Christine Lagarde and Central Bank of Brazil Governor Roberto Campos Neto in Sintra, Portugal, Powell reiterated that the latest inflation readings indicate a return to a disinflationary path, but warned that more data is needed before considering rate cuts.
When asked by CNBC's Sara Eisen why the Fed hasn't followed the European Central Bank's rate cuts, Powell responded that the U.S. is on "a little bit different journey."
He highlighted the Fed's achievements in reducing inflation and maintaining a robust labor market. "We've made quite a bit of progress in bringing inflation back down toward target," Powell said.
"We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing how tight our policy is."
When Will The Fed Cut Rates? And By How Much?
When asked about the timing of potential rate cuts, Powell refrained from committing to specific dates.
The Fed Chair acknowledged the dual risks of acting too soon or too late. "We're well aware that if we go too soon, we could undo the good work we've done in bringing down inflation. If we go too late, we could unnecessarily undermine the recovery and the expansion," he said.
Powell emphasized the need for careful navigation of an economic environment where risks are more balanced compared to a year ago.
The labor market is moving toward better balance, Powell said, with the unemployment rate inching toward sustainable levels and wage increases stabilizing.
"The labor market is cooling off appropriately, and we're watching it very carefully," he said. This cooling is crucial for ensuring that wage growth aligns with inflation and productivity improvements.
At the end, Powell refrained from commenting on whether the Fed will cut rates once or twice by the end of 2024.
Fiscal Policy, National Debt Concerns And Central Bank Independence
Eisen also pressed Powell on the U.S. debt burden and potential fiscal policy shifts.
Powell expressed concerns about a large deficit being run at a time of full employment. "The level of debt we have is not unsustainable, but the path that we're on is unsustainable," Powell stated.
He urged policymakers to prioritize fiscal sustainability, warning that running large deficits during good economic times cannot continue indefinitely. "In the longer run, we'll have to do something sooner or later, and sooner will be better than later," he added.
Powell downplayed any worries about central bank independence if former President Donald Trump were to be re-elected, stating: "I am not focused on that at all. And that's not just a talking point. I really think that we just keep doing our jobs."
Powell emphasized the Federal Reserve's commitment to its mandate, stating that the U.S. economy is performing well with 4% unemployment, 2% growth and inflation at 2.6%.
"Support for the Fed's independence is very high where it really matters on Capitol Hill in both political parties," he said. Powell concluded by stressing his focus on getting the job right and maintaining the current economic trajectory.
Impact of AI, Cyber Risks
On the potential economic impacts of artificial intelligence, Powell admitted uncertainty.
"We've seen massive investment, and there's a sense of something big coming, but it's too early to say how it will affect productivity, inflation, and growth," he said, adding that the Fed is closely monitoring developments in AI to understand its implications better.
Addressing the biggest risks facing the U.S. economy, Powell highlighted cyber risk as a significant concern.
"We know how to deal with credit risk and market dysfunction, but a big successful cyber attack on a financial market utility or a bank is a major worry," he said.
Ensuring the right balance in monetary policy during this critical period also remains a top priority, Powell said.
Outlook For Inflation, Unemployment
Looking ahead, Powell said he expects inflation to be between 2% and 2.5% for the headline Personal Consumption Expenditure inflation index by this time next year.
On unemployment, he expressed hope that it would remain at its current low level, indicating a stable labor market.
Market Reactions
U.S. stocks inched up following Powell's speech, with the S&P 500 Index, as tracked by the SPDR S&P 500 ETF Trust (NYSE: SPY), up 0.2% by 11:30 a.m. in New York.
The tech-heavy Nasdaq 100 was 0.4% higher, while the Dow Jones remained steady for the day.
Treasury yields have slightly softened during the morning session, with the 10-year yield down 2 basis points to 4.44%.
The U.S. dollar slightly fell, with the euro-dollar exchange rate rising to 1.0740. Gold softened 0.1%.