Fed Chair Jerome Powell shares why central bank hasn't yet cut interest rates, even as inflation falls
Jerome Powell, the chair of the Federal Reserve, may have just rescued the economy from inflation without throwing millions out of work. When Americans were suffering through the highest inflation in 40 years, Powell's Fed raised interest rates 11 times to cool the economy. Economists expected a recession but now inflation is tumbling while employment is near a 50-year high. Thursday, we met Powell for a rare interview to talk about interest rates, remaining dangers and the one question that's on everyone's mind.
Scott Pelley: Is inflation dead?
Jerome Powell: I wouldn't go quite so far as that. What I can say is that inflation has come down really over the past year, and fairly sharply over the past six months. We're making good progress. The job is not done. And we're very much committed to making sure that we fully restore price stability for the benefit of the public.
Scott Pelley: But inflation has been falling steadily for 11 months. You've avoided a recession. Why not cut the rates now?
Jerome Powell: Well we have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7% unemployment. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully. And we, you know, want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates.
Inflation has fallen from just over 9% to about 3% —near the Fed's ultimate goal of 2%.
Scott Pelley: Why is your target rate 2%?
Jerome Powell: Interest rates always include an estimate of future inflation. If that estimate is 2%, that means you'll have 2% more that you can cut in your interest rates. The central bank will have more ammunition, more power to fight a downturn if rates are a little bit higher.
Scott Pelley: Are you committed to getting all the way to 2.0 before you cut the rates?
Jerome Powell: No, no. That's not what we say at all, no. We're committed to returning inflation to 2% over time. I've said that we wouldn't wait to get to 2% to cut rates.
We met Powell in the Federal Reserve boardroom where this committee meets every six weeks or so to set the so- called federal funds interest rate-- which influences most loans. Last week, Powell announced the rate would stay at its 23-year high, about five-and-a-half percent—unchanged for six months.
Scott Pelley: You disappointed a lot of people on Wednesday.
Jerome Powell: I can't overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don't have to think about it in their daily lives. That's where we were for 20 years. We want to get back to that.
Scott Pelley: Moving too soon would set off inflation again.
Jerome Powell: You could. Or you could just halt the progress. I think more likely if you move too soon, you'd see inflation settling out somewhere well above our 2% target.
Scott Pelley: And what is the danger of moving too late?
Jerome Powell: If you move too late, then you might-- you might-- policy would be too tight. And that could easily weigh on economic activity and on the labor market.
Scott Pelley: Maybe a recession.
Jerome Powell: Right. And we have to balance those two risks. There is no, you know, easy, simple, obvious path.
Scott Pelley: Was the Fed too slow to recognize inflation in 2021?
Jerome Powell: So in hindsight, it would've been better to have tightened policy earlier.
We thought that the economy was so dynamic that it would fix itself fairly quickly and we thought that inflation would go away fairly quickly without an intervention by us. And so in the fourth quarter of '21, it became clear that inflation was not transitory in the sense that I mentioned. And we pivoted and started tightening. And as I said, it's essential that we did that. It was critical that we did that. And that's part of the story why inflation's coming down now.
We wondered about an interest rate cut in the next committee meeting in March.
Jerome Powell: I think it's not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks.
The next committee vote, then, would be in May.
Scott Pelley: How would you characterize the consensus around this table for rate cuts? Is everyone onboard?
Jerome Powell: Almost all. Almost all of the 19 participants who sit around this table believe that it will be appropriate in their most likely case for us to cut the federal funds rate this year.
Cuts in the federal funds rate would likely be a quarter, maybe half a percentage point at a time as long as inflation data remain good.
Jerome Powell: We just want to see more good data along those lines. It doesn't need to be better than what we've seen, or even as good. It just needs to be good. And so, we do expect to see that.
Back in 2021, little seemed good. Inflation ignited after pandemic disruptions and when the federal government spent $5 trillion to keep the economy afloat. Many in Congress questioned Powell's rapid rate increases and predicted disaster.
Sen. Elizabeth Warren (during June 22, 2022 hearing):And I hope you'll reconsider that before you drive this economy off a cliff. Thank you, Mr. Chairman.
But strangely, when rates went up, the economy added more than 5 million jobs. Powell told us that's because of the odd dynamics of the pandemic. Car sales, for example.
Jerome Powell: There was a semiconductor shortage because so many people were buying goods that involve a lot of semiconductors. So, while demand for cars was spiking because people didn't want to ride public transportation, for example, and they're moving to the suburbs, while that's happening you can't get semiconductors, you can't make cars. So, there's a shortage. So, what happened is inflation just spiked. And-- but as the semiconductor supply came back, prices-- the inflation has moderated a great deal. So it really, these unique features of the pandemic did reverse in a way that brought inflation down.
Jerome Powell turns 71, today. After a career in investment banking, he was appointed to the Fed by Barack Obama, made chairman by Donald Trump and retained by Joe Biden. Powell often travels to listen to the country. And we met him at Spelman College in Atlanta where the talk was of higher prices.
Scott Pelley: Inflation is one thing. Prices are another. And I wonder if there's any reason to believe that people will see the prices of things decline?
Jerome Powell: So the prices of some things will decline. Others will go up. But we don't expect to see a decline in the overall price level. That doesn't tend to happen in economies, except in very negative circumstances. If you think about the basic necessities, things like, you know, bread and milk and eggs prices are substantially higher than they were before the pandemic. And so that's-- we think that's a big reason why people are-- have been relatively dissatisfied with what is otherwise a pretty good economy.
Scott Pelley: But those prices will not soften short of something like a recession.
Jerome Powell: Things that are affected by commodity prices, like, for example, gasoline prices have come way down. Some food prices that-- that incorporate the price of commodities, grains and things like that, those can come down. But the overall price level doesn't come down.
The Federal Reserve was empowered in the Great Depression to regulate the economy by controlling the supply of money and setting interest rates. It also regulates commercial banks for safety –something still challenged by the effects of the pandemic.
Scott Pelley: The value of commercial office buildings all across the country is dropping as people work from home. Those buildings support the balance sheets of banks all across the country. What is the likelihood of another real estate-led banking crisis?
Jerome Powell: I don't think… I don't think that's likely. We've looked at the larger banks' balance sheets, and it appears to be a manageable problem. There're some smaller and regional banks that have concentrated exposures in these areas that are challenged. And, you know, we're working with them.
Scott Pelley: You believe it's a manageable problem? (Powell: I think it appears to be) We're not gonna see bank failures across the country as we did in 2008?
Jerome Powell: I don't think there's much risk of a repeat of 2008. Certainly, there will be some banks that have to be closed or merged out of existence because of this. That'll be smaller banks, I suspect, for the most part.
Just last year there was a panic at the 16th largest bank. A Federal Reserve report blamed bank mismanagement but also inadequate supervision by the Fed itself.
Scott Pelley: You seem confident in the banks, and yet the Silicon Valley Bank, second largest failure in U.S. history. Did the Fed miss that?
Jerome Powell: So, yes, we did. and we forthrightly-- saw that we needed to do better. So, we've spent a lot of time working on ways to make supervision more effective and also to adapt regulation to a more-- to a modern context in which a bank run can happen so much faster than it could have even 20 years ago.
Another economic hangover after the pandemic is a sharp increase in the national debt. Thirty years from now, it is projected to be $144 trillion or $1 million per household.
Scott Pelley: How do you assess the national debt?
Jerome Powell: We mostly try very hard not to comment on fiscal policy and, you know, instruct Congress on how to do their job when actually they have oversight over us.
Scott Pelley: But is the national debt a danger to the economy in your view?
Jerome Powell: In the long run, the U.S. is on an unsustainable fiscal path. The U.S. federal government's on an unsustainable fiscal path. And that just means that the debt is growing faster than the economy.
Scott Pelley: I have the sense this worries you very much.
Jerome Powell: Over the long run, of course it does. You know, we're-- effectively we're borrowing from future generations. It's time for us to get back to putting a priority on fiscal sustainability. And sooner's better than later.
Scott Pelley: What would you say is the single most important factor for the future of American prosperity?
Jerome Powell: With your permission, I'll name two things. One is I think we need to just remember that we have this dynamic, innovative, flexible, adaptable economy. More so than other countries. And this is the big reason why our economy has come through so well. The other thing I'll point to, for the United States, is really, since World War II, the United States has been the indispensable nation supporting and defending democracy, security arrangements, economic arrangements. We've been the leading voice on that. And it is clear that the world wants that. And I would want the United States to know, people in the United States to know that this has benefited our country enormously. It's-- benefits our economy-- so much to have this role. And I just-- I hope we-- I hope that continues.
Jerome Powell has about two years in his current term as chairman. He suggested to us the likely time for the first interest rate cut would be the middle of the year-- a few months before the election.
Scott Pelley: Your decisions inevitably are going to have a bearing on this year's election. And I wonder, to what degree does politics determine your timing?
Jerome Powell: We do not consider politics in our decisions. We never do. And we never will. it's not easy to get the economics of this right in the first place. These are complicated, you know, risk-balancing decisions. If we tried to incorporate a whole 'nother set of factors in politics into those decisions, it could only lead to worse economic outcomes. So, we simply don't do that, and we're not going to do it. We haven't done it in the past, and we're not going to do it now.
Scott Pelley: There are people watching this interview who are skeptical about that.
Jerome Powell: You know, I would just say this. Integrity is priceless. And at the end, that's all you have. And we plan on keeping ours.
Produced by Henry Schuster. Associate producer, Sarah Turcotte. Broadcast associate, Michelle Karim. Edited by Warren Lustig.