Fed Chairman Powell still expects to cut interest rates this

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

Federal Reserve Chairman Jerome H. Powell said Wednesday that he expects the central bank to begin cutting borrowing costs in 2024, but that policymakers still need to gain “greater confidence” that inflation was overcome before they could take action.

“We believe our federal funds rate is likely to peak during this tightening cycle,” Powell said in remarks prepared for testimony before the House Financial Services Committee. “If the economy performs broadly as expected, it will likely be appropriate to begin unwinding policy restraint sometime this year.”

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

The Fed chair warned against cutting rates too soon – before inflation is sufficiently suppressed – and noted that “reducing policy restraint too soon or too much could lead to a reversal of the progress we have made on the “We have seen inflation and may ultimately require even stricter policies.”

He also acknowledged that waiting too long could be fraught with risks, adding that “reducing policy restraint 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 plan their next policy moves. Policymakers quickly increased interest rates between March 2022 and July 2023, increasing them to the current level of 5.25 to 5.5 percent. That has made mortgages, business loans and other forms of borrowing more expensive, helping to slow an economy that otherwise still shows significant momentum.

Politicians do not want to leave interest rates at this high level for too long. A sharper economic slowdown than necessary could lead to an increase in unemployment.

But you also want to avoid declaring victory too early. Although inflation has fallen significantly, it is still above the Fed's 2 percent target.

The central bank's preferred inflation measure rose 2.4 percent on an annual basis in January, well below its peak of nearly 7 percent. The metric rose 2.8 percent after volatile food and fuel prices were removed to provide a clearer view of the inflation trend. (A separate but related measure of inflation, the consumer price index, peaked higher in 2022 and remains slightly higher.)

So far there has been progress in the slowdown, although the labor market has remained strong. New hiring and the unemployment rate are stable at 3.7 percent, which is a low level by historical standards.

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

Fed officials hope their policies will help rebalance the economy so price increases can return to fully normal levels. 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. This could result in companies having less incentive to raise prices to cover rising costs.

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