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Federal Reserve Chair Jerome Powell restated on Wednesday the central bank’s anticipation for interest rate cuts this year, despite the recent surge in economic activity. Powell highlighted that despite the stronger-than-expected economic performance, the Fed’s overarching expectation of diminishing inflation still allows room for interest rate reductions. 

Powell emphasized that indicators suggest the labor market is less constricted than in previous years, alleviating concerns of simultaneous increases in wages and prices. Moreover, while there were signs of inflation uptick in January and February, Powell asserted that the Fed remains steadfast in its belief that inflation will continue to decelerate despite occasional fluctuations. 

“The recent data do not… materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down to 2% on a sometimes bumpy path,” Powell stated during a conference in Stanford, Calif. 

The Federal Reserve had hiked rates rapidly over the past two years in response to escalating inflation, which reached a 40-year peak. However, with measures indicating a cooling in underlying inflation since mid-2023, the Fed’s focus has shifted from debating further rate hikes to contemplating when to implement cuts from the current levels aimed at curbing inflation. 

During their recent meeting last month, most Fed officials projected at least three rate cuts as appropriate for this year. However, they remain cautious about the risks associated with excessively easing policy, fearing it might undermine the progress made in controlling inflation or slow the economy excessively. 

“As progress on inflation continues and labor-market tightness eases, these risks continue to move into better balance,” Powell remarked. 

Investors in interest-rate futures markets are currently estimating a slightly higher than 50% likelihood of a rate cut at the Fed’s mid-June meeting. The Fed’s next meeting is scheduled for April 30-May 1. 

Some analysts argue that robust growth and substantial hiring over the past year indicate that monetary policy is not restrictive. However, Powell disagreed with such views, attributing the rapid economic expansion to factors like improved supply chains and increased workforce participation, including from higher immigration. 

“It’s not right—or maybe too soon—to conclude there is some significant disconnect there in terms of monetary-policy transmission,” Powell stated. 

Powell also downplayed the debate regarding whether there has been an increase in the neutral rate of interest, emphasizing that the current policy setting remains well above even the highest estimates of the neutral rate. 

“Where the neutral rate of interest settles out doesn’t really matter for policy today,” Powell concluded. 

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