Federal Reserve Chair Jerome Powell acknowledged ongoing internal debates over the timing of interest rate cuts, defended the central bank’s massive balance sheet and warned against political interference during a sweeping discussion at Harvard University on Monday.

Speaking to an audience in Cambridge, Mass., Powell noted that while inflation has cooled substantially since its 2022 peak, it remains stubbornly higher than the Fed’s 2% target. This cautious stance from the Fed chair signals to the mortgage and real estate industry that a swift, aggressive lowering of borrowing costs is not on the horizon, especially as Federal Open Market Committee (FOMC) members remain split between holding rates steady and initiating cuts.

During the event, Powell provided a rare window into the current dynamics among the 12 voting members of the FOMC. While the committee typically operates with a high degree of consensus, Powell conceded that recent meetings have seen a divergence in strategy.

“Lately, there’s been some disagreement,” Powell told the audience. “There’s been votes to keep interest rates the same, but some members of the FOMC have decided instead to vote to decrease interest rates.”

For the housing market, which has been closely monitoring the Fed for signs of relief from elevated mortgage rates, the lack of unanimity underscores a highly data-dependent environment. The primary hurdle remains the Fed’s inflation mandate. Powell highlighted that while inflation has consistently declined since the severe spikes of 2022, reaching the final 2% goal is proving to be a complex challenge.

According to the moderator, some economists argue that the “last mile” of inflation reduction is extremely difficult and could potentially require an economic recession to achieve, while others believe the 2% target is well within reach without such severe consequences. He asked Powell how the Fed approached this tension.

Despite these differing economic theories, Powell reaffirmed that the FOMC remains resolute in its commitment to getting inflation back down to the 2% mark on a sustained basis. He also pointed out that the economy did not experience a recession in 2022 and 2023, despite economists’ fears as interest rates rose.

Beyond short-term interest rates, Powell also addressed the Fed’s balance sheet, a major macroeconomic factor that indirectly influences long-term borrowing costs, such as 30-year fixed-rate mortgages. He defended the central bank’s large-scale asset purchases — commonly known as quantitative easing — which were deployed during the 2008 financial crisis and again during the pandemic.

Powell explained that when short-term interest rates are slashed to zero — which occurred in 2020 as an emergency response to the COVID-19 pandemic — the Fed purchases longer-term, government-guaranteed securities to successfully hold down long-term rates and stimulate economic activity because that is the only tool left in their arsenal. Although critics have assailed this practice, the central bank head defended the policy, arguing that it helped address pandemic-related economic disruptions.

In navigating these complex economic waters, Powell concluded by emphasizing the absolute necessity of the Federal Reserve’s autonomy. He stated firmly that the central bank must not be “reactive to political things at all,” stressing that “the Fed needs to be fully politically independent” to successfully fulfill its mandate for the American economy.

He cautioned that any given administration may be tempted to pressure the Fed into using the monetary tools in the arsenal, but the Fed chair should be careful to adhere to the central bank’s stated mission. 

This is essential, Powell explained, for navigating financial disruptions, as an independent central bank is needed to weather economic storms.

“There will be hurricanes,” he said, but since you don’t know what direction the disaster will go or the form it will take, “you want highly resilient financial institutions.”

Powell stated firmly that the central bank must not be “reactive to political things at all,” stressing that “the Fed needs to be fully politically independent” to successfully fulfill its mandate for the American economy.