Powell warns of inflation risks if US Fed cuts rates ‘too aggressively’

WASHINGTON: US Federal Reserve chief Jerome Powell warned Tuesday that slashing interest rates too quickly could allow inflation to remain elevated, but stressed in prepared remarks that “there is no risk-free path” forward.

“If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore two-percent inflation,” he said in a speech to a Rhode Island event.

“If we maintain restrictive policy too long, the labor market could soften unnecessarily,” the US central bank chair added.

Powell’s speech comes after the US Fed made its first rate cut of the year last week, lowering the benchmark lending rate by 25 basis points in a widely anticipated move.

But his remarks underscore the tightrope that Fed officials walk as they work to maintain price stability and maximum employment — balancing inflation and labor market concerns.

Policymakers have been divided on the best path forward as the jobs market weakened while inflation remained above their two-percent target.

New Fed Governor Stephen Miran, who was newly appointed by President Donald Trump, voted against last week’s rate decision and instead pushed for a bigger 50 basis points cut.

On the other hand, even as policymakers overall penciled in two more rate reductions this year, several projected no further cuts as well.

On Tuesday, Powell vowed that officials would ensure a one-time increase in costs due to Trump’s sweeping tariffs does not become an ongoing inflation problem.

For now, he said, the Fed’s policy stance leaves it “well positioned to respond to potential economic developments.”

He also noted in his prepared speech that uncertainty around the path of inflation remains high, even as risks surrounding employment have risen as well.

He noted that the overall economic effects of major changes in trade, immigration, fiscal and regulatory policy remain to be seen.