The Federal Reserve (Fed) has taken a cautious approach to lowering interest rates based on forecasts that inflation will continue to decrease. This approach can be summarized by the phrase “trust but verify.” Despite this, the US Fed decided to leave interest rates unchanged this week, with officials indicating that any reductions are unlikely to happen before September. Most Fed officials are estimating that interest rates could be cut once or twice by the end of the year, depending on inflation figures.
The European Central Bank (ECB) and the Bank of Canada have already lowered interest rates in their countries, suggesting further reductions. However, the US is in a different situation due to factors such as stronger growth, a slow seep of monetary policy into the economy, less reliance on bank lending, and protections for homeowners from rapid rate hikes. Jerome Powell emphasized the need for convincing evidence that inflation is actually decreasing before making any decisions to reduce interest rates.
The Fed has learned from past mistakes when it miscalculated inflation and has shifted its focus to monthly readings in order to make more informed decisions going forward. The Fed is now looking for solid data before deciding on interest rate cuts to avoid falling into a trap where they may respond too late to economic weakness. Powell has acknowledged that there is a risk associated with waiting too long to make decisions that could impact employment and the economy.
Once the decision to reduce interest rates is made, the Fed intends to do so at regular intervals. They have learned from past mistakes and are now taking a cautious approach to ensure credibility and avoid making hasty decisions. Figure out when the optimal time to lower interest rates will be remains a complex task. Powell emphasized that
