Jerome Powell’s Honest Opinion on Lowering Interest Rates

Are you committed to getting all the way to 2.0 before you cut the rates?

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. Recently, Scott Pelley of 60 Minutes sat down with Jerome Powell, one of the most influential people when it comes to the American economy. The reason being, Jerome Powell is the chair of the FOMC, a group of people that meet every 6 weeks or so to decide what to do with interest rates.

I must say, Scott did a really good job interviewing Powell because somehow he absolutely grilled the guy, asked all the pressing questions we want answers for, but he came across really nice, so he got a lot of answers out of Jerome. It was good to hear Powell in an environment where it isn't just reading off a prompter.

So in this video, we're going to cover what Powell said about the inflation situation, how the FED is likely going to go about its idea of interest rate cuts in 2024, and also how Jerome sees the big problem that is the United States national debt. Also, I do have to apologize; usually, I love showing you guys clips of these interviews. Unfortunately, 60 Minutes is very strict on their copyright, so we've had to work around that a little bit, but hopefully, you guys still enjoy the video.

So with that said, let's begin. The first topic on the agenda: How is Jerome feeling about the inflation situation right now? Inflation cooled rapidly around mid-2022 and seems to have settled to a level of 3 to 4%. But is that good enough? Can we consider inflation dead?

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.

Now, admittedly, this clip does sound straight out of an FOMC report, and he's basically reiterating the approach of caution that the FED will show when thinking about inflation and interest rates. I do like this approach, though—not to necessarily cave too quickly to the pressure around lowering interest rates. I've spoken about this at length in previous videos, but the main reason the FED needs to be cautious is the 1970s.

In the 70s, the American people copped high inflation in three big bouts because each time inflation started to cool, the FED lowered rates, which just loosened the dog's leash, and off it went again. So there is that element of caution to not shoot yourself in the foot.

Have a listen to Jerome answering the question that's on everyone's mind right now: Inflation has been falling steadily for 11 months, right? You've avoided a recession. Why not cut the rates now?

Well, we have a strong economy. Growth is going on at a solid pace. The labor market is strong—3.7% unemployment—and inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully.

You know, we 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.

So here, Jerome raises the exact argument that Steve Eisman predicted from his recent CNBC interview. He's basically saying that yes, the FED can start to approach the idea of interest rate cuts. However, right now, the economy is hot and unemployment is very low, so in general, citizens are holding up okay and don't desperately need the lower rates.

But on the flip side, there is one thing that hasn't quite been completely dealt with yet, and that is inflation. So Jerome is basically explaining that the FED might consider lowering rates, but the priority here is on keeping inflation under control—not necessarily making a cushier borrowing environment for citizens and businesses.

But here we get a very interesting tidbit of information from Jerome talking about why the FED's inflation target is 2% and why he's more in favor of slightly higher interest rates going forward. Why is your target rate 2%?

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 interest rates. The central bank will have more ammunition, more power to fight a downturn if rates are a little bit higher.

Are you committed to getting all the way to 2.0 before you cut the rates?

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.

So the FED are looking at keeping interest rates higher and inflation lower, because if they can achieve that, then they're in the box seat. They'd have some room to lower interest rates to stimulate the economy if needed, but would also be able to sit reasonably comfortably that if that did cause some inflation, it wouldn't quickly lead to an inflation rate that was really hard to control.

So even though Jerome says that he wouldn't wait for 2.0% inflation before cutting rates, if you read between the lines, I think he's still definitely messaging that the FED's generally going to keep rates at this higher level until inflation is fully controlled, which may take some time. This is the main reason why the FED right now continues just to hold rates steady despite the general public really wanting them to lower the rates.

You disappointed a lot of people on Wednesday, and 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.

Moving too soon would set off inflation again. 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.

And what is the danger of moving too late?

If you move too late, then policy would be too tight, and that could easily weigh on economic activity and on the labor market—maybe a recession. We have to balance those two risks. There is no simple obvious path, and that's the real takeaway. It's a balancing act.

As Warren Buffett says, in economics you can't just do one thing; you have to ask, "And then what?" At the moment, the balanced conclusion is to simply hold rates steady. Inflation isn't as low as what the FED would like; the people want lower rates, but the economy doesn't need it, so they are on the side of not lowering.

If the economy was suffering, unemployment was rising, and inflation was really low, the balanced conclusion would probably be the opposite. So that's how Jerome and the FED currently see things, and this is what he said about the possibility of a rate cut at the next FOMC meeting.

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. So it sounds less likely that the US will see an interest rate cut soon.

But that begs the question: What is the consensus of the Federal Open Market Committee? Do they all agree with Powell's viewpoint about future rate cuts?

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.

So my takeaway is yes, there may very well be some rate cuts towards the middle and latter stages of the year, so long as inflation continues a downtrend. However, I definitely think it's worth tempering expectations as to the amplitude of these rate cuts. I think at best we get a few 0.25% rate cuts, but because of the Federal Reserve's predicament, personally, I'm not expecting interest rates to fall much lower than 5% as per the current situation.

It does sound counterintuitive and also risky, but of course, the FED's decisions also have a flowing effect on the US government. The US government is, as we know, facing quite the debt problem. They run a large deficit; they need to print a lot of bonds each year, and they also need to roll over old bonds at new higher interest rates. This isn't great for their debt situation, as it means more and more money has to come out of the government's pocket just to pay the interest on their debts.

So how does Powell see this?

Pretty commend. How do you assess the national debt?

We mostly try very hard not to comment on fiscal policy and instruct Congress on how to do their job when actually they have oversight over us. But is the national debt a danger to the economy in your view?

In the long run, the US is on an unsustainable fiscal path. The US Federal government's on an unsustainable fiscal path, and that just means that the debt is growing faster than the economy.

Unfortunately for America, this is a trend that seems to be worsening. In 2023, the United States brought in $4.44 trillion in revenue and spent $6.13 trillion, meaning they had a $1.7 trillion deficit that they had to make up by going further into debt.

Now, as you can see from this graph, even taking away the problematic COVID years, the deficit only seems to be worsening, and the US now hasn't seen a surplus since 2001. As I said before, this means more and more debt is being added to the pile, but that wasn't such an issue back when interest rates were at 1 or 2%. The government could easily pay that back, but now, of course, interest rates are much higher, and this puts the squeeze on the American government.

Now, if they take on more debt, they're committing to much higher repayment costs, and that takes money away from other areas of spending. So with that in mind, what does Jerome suggest as the solution?

I have the sense this worries you very much over the long run.

Of course it does. We're effectively borrowing from future generations. It's time for us to get back to putting a priority on fiscal sustainability, and sooner is better than later.

While he's obviously going to say that the government needs to fix things more so than the FED, I tend to agree with him. The Federal Reserve's job is to do two things: it's to promote price stability and maximum employment in the US economy. Nowhere in the job description does it say the Federal Reserve needs to work with the US government behind the scenes to help the government's self-inflicted problems go away.

This is a really interesting point to consider, especially in 2024, as later this year the US is going to have a presidential election. There's no doubt that the actions taken by the Federal Reserve very much do have an impact on the economy, and with most voters not understanding the nuance of macroeconomics and blaming economic conditions simply on the government, there is no escaping the fact that the actions from the Federal Reserve will influence some voters.

So how does Jerome see this problem, and does this affect the decisions being made by the Federal Reserve?

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?

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 other 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. There are people watching this interview who are skeptical about that. 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.

So Powell has certainly laid out his position, and I hope what he says turns out to be the truth because he's absolutely right. If the Federal Reserve were to take its eye off the ball, the American economy could really suffer. As he says, they've got enough to watch right now trying to get inflation down while keeping employment up and the economy humming. Messing around in politically driven decisions simply wouldn't be good for anyone, and that's completely glossing over the fact that it would obviously be super dodgy as well.

But with that said, everyone, that is arguably Jerome Powell's most important interview to date. One more thing I just quickly wanted to mention: If you wanted to check out a completely free investing masterclass over on New Money Education, you can now join the community over there. As I said, completely free—please check out the link down in the description.

Also, I'm starting to post more on Instagram, so if you want to keep up to date with more short-form New Money content, then please come and follow me at new.money.official. But with that said, guys, that will do us for today. Thanks very much for watching, and I'll see you guys in the next video.