Jerome H. Powell, Chairman of the Federal Reserve, said on Wednesday that he thought the central bank would begin reducing borrowing costs in 2024, but that policymakers still needed to gain “greater confidence” that inflation had been defeated before take actions.
“We believe our policy rate is likely to be at its peak during this tightening cycle,” Powell said during testimony before the House Financial Services Committee. “If the economy broadly evolves as expected, it will probably be appropriate to begin reducing political restraint sometime this year.”
Powell’s comments on economic policy were largely in line with what markets were expecting. Authorities raised interest rates in 2022 and 2023 to slow growth and control inflation, and have been signaling for months that they could soon begin reducing those rates as price increases cool. Federal Reserve officials have also been clear that they do not want to start reducing borrowing costs prematurely and have kept their options open regarding timing.
But while Powell said little new about the outlook for rates, he provided important news on another topic: banking regulation.
In addition to guiding the economy with its interest rate policies, the Federal Reserve supervises the nation’s largest banks with an eye to maintaining financial stability. During his testimony Wednesday, Powell faced a series of questions about major banking regulations that the Federal Reserve and other regulators proposed last year, called “The End of Basel III.”
The Federal Reserve chairman noted that major changes were coming to the proposed rules and that it was a “very plausible option” that regulators could reissue them entirely, something that lobbyists representing the largest U.S. banks have pushed for. Screams.
Rate outlook remains unchanged
While much of the big news during the hearing related to banking regulation, investors watched Powell’s testimony closely for any hints about what might happen next with 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 careful about making them.
“What we’ve seen so far is an economy that is growing at a solid pace,” Powell said, even as inflation falls sharply. “So those are the conditions that we see, they are very attractive conditions, and we are trying to use our policies to maintain that growth and keep the labor market strong, while making further progress on inflation.”
Fed officials rapidly raised interest rates from March 2022 to July 2023, raising them to a range of 5.25 to 5.5 percent, where they currently are. That has made mortgages, business loans and other types of loans more expensive, helping to slow an economy that otherwise retains substantial momentum.
Officials have signaled they could cut interest rates several times this year, and Wall Street is trying to gauge when those moves might begin.
The Federal Reserve’s next meeting will be March 19-20, but few investors expect officials to cut interest rates at that meeting. Markets see the Federal Reserve’s June meeting as a most likely candidate for the first rate cut, and are betting that central bankers could reduce borrowing costs three or four times by the end of the year.
The Federal Reserve tries to strike a balance
The Federal Reserve chair warned against cutting rates too soon, noting that “reducing policy moderation too early or too much could result in a reversal of the progress we have seen on inflation and ultimately require an even stricter policy.”
While inflation has dropped, it remains above the Federal Reserve’s 2 percent goal.
The central bank’s preferred measure of inflation rose 2.4 percent annually in January, well below its peak of nearly 7 percent. The measure went up by 2.8 percent after excluding volatile food and fuel prices to get a clearer reading of the inflation trend. (A separate but related measure of inflation, the consumer price index, peaked higher in 2022 and remains slightly highest.)
Still, Powell also acknowledged that waiting too long to lower interest rates could carry risks, because “reducing policy moderation too late or too little could unduly weaken economic activity and employment.”
So far, progress in cooling has come even as the labor market has remained strong, with strong hiring and unemployment hovering by 3.7 percent, a low level by historical standards.
Federal Reserve officials are hopeful that their policy is helping to restore balance to the economy so that price increases can return 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 cooling. That could leave companies with less impetus to raise prices to cover rising costs.
Powell noted that in the labor market, “supply and demand conditions have continued to become better balanced.”
Proposed banking rules get airtime
While some lawmakers asked about the labor market and inflation, the Federal Reserve chair answered many questions about the central bank’s hot proposal to increase banking regulation, the “end of Basel III.”
The proposal, which is the U.S. version of an international standard, would introduce a series of changes to banking supervision that would ultimately increase the amount of capital — a financial cushion — that big banks must hold.
While regulation is often an esoteric and not particularly dramatic issue, banks and their lobbyists have waged a strident campaign against the proposal. The effort even included a television advertisement warning, against a backdrop of somber piano music, that the proposal It would cost families, farmers and seniors.
Even within the Washington-based Federal Reserve board, governors who will have to vote on the proposal have raised questions or expressed total opposition to the measures, which were championed by Michael Barr, vice chairman of supervision at the Federal Reserve, and his fellow banking regulators.
Powell repeatedly noted that changes to the proposal were coming.
“We heard the concerns and I expect there will be broad and material changes to the proposal,” Powell said, adding that the final product would have “broad support” within the Fed and in the world at large.
He said the Fed had not “made that decision” to re-propose banking reform, but that it was a “very plausible option.”
That was big news: Banks have been pressuring the central bank to withdraw the proposal and release a new version. A new proposal would be a win for the industry, though it would also likely push back the timeline for finalizing the politically complicated rules until the 2024 election season.
