Federal Reserve Chair Jerome Powell announced on Wednesday that the era of extremely low interest rates, which persisted from the 2008 financial crisis through the pandemic, is likely over. Speaking before the House Financial Services Committee, Powell indicated that the neutral interest rate necessary to maintain 2% annual inflation has probably risen, implying that future Fed policies will not revert to near-zero interest rates seen between 2009 and 2017.
Powell noted that while there has been significant progress in controlling inflation, the baseline Fed interest rate needed to achieve low unemployment and price stability has likely increased due to pandemic-related inflation and subsequent price adjustments. He explained that with the current policy rate more than 5%, it appears to be restrictive but not excessively so, suggesting that the neutral rate has risen, necessitating slightly higher rates going forward.
Despite recent increases in unemployment and lower inflation readings, indicating the potential for upcoming rate cuts, Powell’s comments suggest that investors should not expect a significant drop in rates to counteract the rapid rate hikes that began in March 2022. His remarks imply that any rate cuts will be modest and that the longer-term neutral rate will remain higher than in the past.
