Federal Reserve Chairman Jerome Powell arrives to testify during the House Financial Services Committee hearing titled “The Federal Reserve’s Semiannual Monetary Policy Report,” in the Rayburn Building on Wednesday, June 21, 2023.
Tom Williams | CQ-Roll Call, Inc. | Getty Images
Federal Reserve Chairman Jerome Powell on Wednesday reiterated that he expects interest rates to begin lowering this year, but was not yet ready to say when.
In prepared remarks for congressionally mandated appearances on Capitol Hill Wednesday and Thursday, Powell said policymakers remain alert to the risks posed by inflation and don’t want to taper too quickly.
“When considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook and the balance of risks,” he said. “The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2 percent.”
Those remarks were taken verbatim from the Federal Open Market Committee’s statement after its most recent meeting, which ended on January 31.
Rates probably at peak
Overall, the speech broke no new ground on monetary policy or the Fed’s economic outlook. However, they indicated that officials remain concerned about not losing the progress made against inflation and will make decisions based on incoming data rather than a predetermined course.
“We believe that our policy rate is probably at its peak for this tightening cycle. If the economy develops broadly as expected, it will probably be appropriate to begin to restore policy moderation at some point this year,” Powell said in the comments. “But the economic outlook is uncertain, and continued progress toward our 2 percent inflation target is not assured.”
He again noted that cutting rates too quickly risks losing the fight against inflation and likely having to raise rates, while waiting too long poses a danger to economic growth.
Markets had widely expected the Fed to tighten aggressively after 11 rate hikes totaling 5.25 percentage points that ran from March 2022 to July 2023.
In recent weeks, however, those expectations have changed after multiple cautionary statements from Fed officials. The January meeting helped cement the Fed’s cautious approach, with the statement explicitly saying that rates are not coming yet despite the market’s outlook.
As things stand, futures market prices point to the first cut coming in June, part of four cuts this year totaling a full percentage point. That’s slightly more aggressive than the Fed’s outlook in December for three cuts.
Inflation falling
Despite the resistance to moving forward on cuts, Powell noted the movement the Fed has made toward its 2% inflation target without upsetting the labor market and broader economy.
“The economy has made considerable progress toward these goals over the past year,” Powell said. He noted that inflation “has eased a lot” because “the risks to achieving our employment and inflation targets have moved into better balance.”
Inflation by the Fed’s favorite gauge is currently running at a 2.4% annual rate — 2.8% when you strip out food and energy in the core reading the Fed prefers to focus on. The numbers reflect “a marked slowdown from 2022, which was spread across both prices of goods and services.”
“Longer-term inflation expectations appear to have remained well anchored, as reflected by a wide range of surveys of households, businesses and forecasters, as well as measures of financial markets,” he added.
Powell is likely to face a variety of questions during his two-day visit to Capitol Hill, which begins with an appearance Wednesday before the House Financial Services Committee and ends Thursday before the Senate Banking Committee.
Although the Fed tries to stay out of politics, a presidential election year presents particular challenges.
Former President Donald Trump, the likely Republican nominee, was a fierce critic of Powell and his colleagues during his time in office. Some congressional Democrats, led by Sen. Elizabeth Warren of Massachusetts, have called on the Fed to cut rates as pressure builds on lower-income families to make ends meet.