Fed Chairman Powell still expects interest rates to be cut this year, but not yet
Federal Reserve Chairman Jerome H. Powell said Wednesday that he thinks the central bank will start cutting borrowing costs in 2024, but that policymakers still need to gain “more confidence” that inflation has been defeated before they take action.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Mr. Powell said in remarks prepared for testimony before the House Financial Services Committee. “If the economy develops broadly as expected, it will likely be appropriate to begin scaling back policy at some point this year.”
The Fed’s next meeting is on March 19 and 20, but few investors expect officials to cut rates at that meeting. Markets view the Fed’s June meeting as one more likely candidate for the first rate cut, and are betting that central bankers can cut borrowing costs three to four times by the end of the year.
The Fed chairman cautioned against cutting rates too early – before inflation has sufficiently died down – noting that “reducing policy leverage too early or too much could result in a reversal of the progress we have made.” the area of inflation and would ultimately require even tighter policy.”
He also acknowledged that there could be risks from waiting too long, adding that “reducing policy responses too late or too little could unnecessarily weaken economic activity and employment.”
Mr. Powell and his colleagues are trying to strike a delicate balance as they determine their next policy steps. Policymakers quickly raised interest rates between March 2022 and July 2023, to the 5.25 to 5.5 percent level where they are now. That has made mortgages, corporate loans and other types of loans more expensive, putting the brakes on an economy that otherwise maintains substantial momentum.
Policymakers do not want to leave interest rates this high for too long. If the economy cools more than necessary, unemployment could rise.
But they also want to avoid declaring victory too early. Although inflation has fallen significantly, it still hovers above the Fed’s 2 percent target.
The central bank’s preferred inflation measure rose 2.4 percent year-on-year in January, well below a peak of almost 7 percent. The size went up by 2.8 percent after removing volatile food and fuel prices for a clearer picture of the inflation trend. (A separate but related inflation measure, the consumer price index, peaked higher in 2022 stays a little more exalted.)
So far, progress on the slowdown has come even as the labor market has remained strong, with solid hiring unemployment is floating at 3.7 percent, a low level by historical standards.
Inflation “has declined substantially, and the slowdown in inflation has occurred without a significant increase in unemployment,” Mr. Powell said.
Fed officials are hopeful that their policies will help rebalance the economy so that price increases can fully return to normal levels. For example, the number of vacancies has fallen over the past year, and as companies compete less aggressively for workers, wage growth is cooling. That could give companies less incentive to raise prices to cover climbing costs.
Mr. Powell noted that in the labor market, “supply and demand conditions have become increasingly balanced.”