Fed Chair Powell still expects to cut rates this year, but not yet

Jerome H. Powell, Chairman of the Federal Reserve, said Wednesday that he believes the central bank will begin reducing borrowing costs in 2024, but that policymakers still need to gain “greater confidence” in controlling inflation before acting.

“We think our policy rate is probably at its highest for this tightening cycle,” Mr. Powell said in a speech prepared for testimony before the House Financial Services Committee. “If the economy generally performs as expected, it will likely be appropriate to begin reducing policy stringency at some point this year.”

The next Fed meeting is March 19-20, but few investors expect officials to cut interest rates at that meeting. Markets view the June Fed meeting as a most likely candidate for the first rate cut, and are betting that central banks could cut borrowing costs three or four times by the end of the year.

The Fed chairman warned against cutting rates too soon – before inflation is sufficiently suppressed – noting that “reducing policy tightening too soon or too much could result in a reversal of the progress we have seen in inflation and ultimately require even stricter policy. »

He also acknowledged that waiting too long could carry risks, adding that “reducing policy stringency too late or too little could unduly 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 rapidly increased interest rates between March 2022 and July 2023, bringing them to a range of 5.25% to 5.5%, where they are now. That has made mortgages, business loans and other types of borrowing more expensive, helping to dampen an economy that otherwise retains substantial momentum.

Policymakers don’t want to leave interest rates this high for too long. A much-needed economic slowdown could increase unemployment.

But they also want to avoid declaring victory too soon. Even though inflation has fallen significantly, it still remains above the Fed’s 2% target.

The central bank’s preferred measure of inflation climbed 2.4 percent on an annual basis in January, well below its peak of nearly 7 percent. The measurement increased by 2.8 percent after removing volatile food and fuel prices for a clearer reading of the inflation trend. (A separate but related measure of inflation, the consumer price index, reached a higher peak in 2022 and remains slightly higher.)

So far, progress in cooling has occurred even as the job market has remained strong, with solid hiring and unemployment is high at 3.7 percent, low by historical standards.

Inflation “has eased significantly, and the slowdown in inflation has occurred without a significant increase in unemployment,” Mr. Powell said.

Fed officials hope their policy will help restore balance to the economy, so that price increases can return fully to a normal level. For example, the number of job openings has declined over the past year, and as companies compete less aggressively for employees, wage growth is slowing. That could leave companies with less incentive to raise prices to cover rising costs.

Mr. Powell noted that in the labor market, “supply and demand conditions continued to balance.”