Jerome H. Powell, chairman of the Federal Reserve, said on Wednesday that he believed the central bank would start cutting borrowing costs in 2024, but that policymakers needed to gain “greater confidence” that inflation was contained before making a movement.
“We think our policy rate is probably at its peak for this tightening cycle,” Mr. Powell said during testimony before the House Financial Services Committee. “If the economy develops broadly as expected, it will probably be appropriate to start imposing policy restraint at some point this year.”
Mr. Powell’s comments on economic policy were largely in line with market expectations. Policymakers have raised rates in 2022 and 2023 to slow growth and rein in inflation, and have signaled for months that they could soon start cutting those rates as price increases moderate. Fed officials have also been clear that they do not want to start cutting borrowing costs prematurely and have kept their options open on the timing.
But while Mr. Powell said little about the outlook for interest rates, he made big news on another issue: bank regulation.
In addition to guiding the economy with its interest rate policies, the Fed oversees the nation’s largest banks with the goal of maintaining financial stability. During his testimony on Wednesday, Mr. Powell faced a barrage of questions about major banking regulations proposed by the Fed and other regulators last year, dubbed the “Basel III Endgame.”
The Fed chairman signaled that major changes were coming to the proposed rules and that it was a “very reasonable option” that regulators could reissue them entirely, something lobbyists representing America’s biggest banks have pushed vociferously for.
Outlook’s rating remains unchanged
While much of the big news during the hearing was about banking regulation, investors were watching Mr. Powell’s testimony closely for any hints about what might be next for interest rates. What they got was a continuation of the message the Fed has been sending for months: Rate cuts are coming, but the Fed wants to be cautious about making them.
“What we’ve seen so far is an economy that is growing at a steady pace,” Mr. Powell said, even as inflation is coming down sharply. Those are the conditions that we’re seeing – they’re very attractive – and we’re trying to use our policies to sustain that growth and keep that labor market strong while making further progress on inflation.”
Fed policymakers raised interest rates quickly from March 2022 to July 2023, taking them to a range of 5.25 to 5.5%, where they currently stand. That has made mortgages, business loans and other types of borrowing more expensive, helping to hold back an economy that otherwise maintains considerable momentum.
Officials have indicated they could cut rates several times this year, and Wall Street is trying to gauge when those moves could begin.
The Fed meets next on March 19-20, but few investors expect officials to cut rates at that meeting. Markets see the June Fed meeting as the most likely candidate for the first rate cut and are betting that central bankers could cut borrowing costs three or four times by the end of the year.
The Fed is trying to strike a balance
The Fed chair warned against cutting rates too soon, noting that “reducing policy tightening too soon or too long could lead to a reversal of the progress we’ve seen in inflation and ultimately require even tighter policy.”
While inflation has eased, it remains above the Fed’s 2% target.
The central bank’s preferred measure of inflation rose 2.4% year-on-year in January, well below its peak of nearly 7%. The measure rose 2.8 percent after stripping out volatile food and fuel prices for a clearer reading of the inflation trend. (A separate but related measure of inflation, the Consumer Price Index, hit a higher peak in 2022 and remains slightly higher.)
But Mr. Powell also acknowledged that there may be risks in waiting too long to cut interest rates, because “reducing policy tightening too late or too little could unduly weaken economic activity and employment.”
So far, progress in the cooling sector has come even as the labor market remains strong, with steady hiring and unemployment hovering at 3.7%, low by historical standards.
Fed officials hope that their policy helps bring the economy back into balance so that price increases return to normal levels. For example, the number of jobs has declined over the past year, and as companies compete less aggressively for employees, wage growth is slowing. That could leave companies with less leverage to raise prices to cover climbing costs.
Mr. Powell noted that in the labor market “supply and demand conditions continued to be in better balance.”
Suggested Banking Rules Get airtime
While some lawmakers asked about the labor market and inflation, the Fed chair raised many questions about the central bank’s proposal to strengthen banking regulation, the “Basel III endgame.”
The proposal, which is the U.S. version of an international standard, would make a series of changes to banking supervision that would ultimately increase the amount of capital — a financial buffer — that big banks must maintain.
While regulation is usually an arcane and not particularly dramatic issue, banks and their lobbyists have mounted a fierce campaign against the proposal. The effort even included a television ad warning, set to somber piano music, that the proposal would cost families, farmers and the elderly.
Even on the Fed’s Washington-based board, governors who will have to vote on the proposal have raised questions or voiced outright opposition to the measures, which were championed by Michael Barr, the Fed’s vice chairman for supervision, and his fellow banking regulators.
Mr. Powell repeatedly noted that changes were to be made to the proposal.
“We are listening to the concerns and I expect there will be broad and meaningful changes to the proposal,” Mr. Powell said, saying the final product would have “broad support” within the Fed and the wider world.
He said the Fed had not “made that decision” to re-propose banking reform, but that it was a “very reasonable option”.
This was big news: the banks pressured the central bank to withdraw the proposal and issue a new issue. A re-proposal would be a win for the industry, though it would also likely push the timeline for finalizing the rules — which are politically fraught — into the 2024 election season.
