Jerome H. Powell, the chairman of the Federal Reserve, said on Wednesday that he thought the central bank would begin lowering borrowing costs in 2024 but that policymakers still needed to gain “greater confidence.” that inflation is covered before making a move.
“We believe 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 is developing broadly as expected, it will probably be appropriate to start dialing back policy restraint at some point this year.”
Mr. Powell’s comments on economic policy were largely in line with what markets had expected. Policymakers have raised interest rates in 2022 and 2023 to slow growth and control inflation, and have signaled for months that they may begin lowering those rates as inflation cools. Fed officials have also been clear that they do not want to start cutting borrowing costs prematurely, and are keeping their timing options open.
But while Mr. Powell said little new about the rate outlook, he did make significant news on another topic: bank regulation.
In addition to guiding the economy with its interest rate policies, the Fed oversees the nation’s largest banks with an eye toward maintaining financial stability. During his testimony on Wednesday, Mr. Powell faced many questions about major bank regulations proposed by the Fed and other regulators last year, dubbed the “Basel III Endgame.”
The Fed chair has signaled that major changes are coming to the proposed rules, and that it’s a “very fair option” that regulators could reissue them entirely, something pushed back by lobbyist representing America’s largest banks.
Outlook Rate Remains Unchanged
While most of the big news during the hearing was related to bank regulation, investors were watching Mr. Powell’s testimony closely for any hint about what might be next for interest rates. What they got was a continuation of the message the Fed had been sending for months: Rate cuts are coming, but the Fed wants to be cautious about doing so.
“What we’ve seen so far is an economy that’s growing at a solid pace,” Mr. Powell said, even as inflation has come down sharply. “So those are the conditions we’re seeing – they’re very attractive conditions – and we’re trying to use our policies to sustain that growth, and keep the labor market strong, while also achieving additional -inflation progress.”
Fed policymakers quickly raised interest rates from March 2022 to July 2023, lifting them to the 5.25 to 5.5 percent range, where they currently sit. This makes mortgages, business loans and other types of borrowing more expensive, helping to put the brakes on an economy that otherwise maintains great momentum.
Officials have signaled they may cut interest rates several times this year, and Wall Street is trying to gauge when those steps might begin.
The Fed next meets on March 19-20, but few investors expect officials to lower interest rates at that meeting. Markets see the Fed’s June meeting as a more likely candidate for the first rate cut, and bets that central bankers could lower 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 restraint too soon or too much could result in a reversal of the development we’ve seen in inflation and the the latter requires stricter policies.”
While inflation has eased, it remains above the Fed’s 2 percent goal.
The central bank’s preferred inflation measure rose 2.4 percent on an annual basis in January, well below its nearly 7 percent peak. Scale up 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, reaches a higher peak in 2022 and remains partial higher.)
However, Mr. Powell also acknowledged that there may be risks in waiting too long to lower interest rates, as “reducing policy restraint too late or too little could severely dampen economic activity and work.”
So far, the growth in cooling has come even as the job market has remained strong, with steady hiring and no job hanging around at 3.7 percent, a low level by historical standards.
Fed officials hope that their policy helps bring the economy back into balance, so that price increases can return to normal levels. For example, the number of job vacancies has fallen over the past year, and as companies compete less aggressively for employees, wage growth is cooling. That could leave companies with less power to raise prices to cover surge costs.
Mr. Powell said that in the labor market, “supply and demand conditions continue to be better balanced.”
Proposed Bank Rules Get Airtime
While some lawmakers asked questions about the labor market and inflation, the Fed chair had plenty of questions about the central bank’s hot-button proposal to strengthen bank regulation, the “Basel III Endgame.”
The proposal, which is an American version of an international standard, would make several changes to bank supervision that would ultimately increase the amount of capital — a financial buffer — that big banks must maintain.
While regulation is generally an esoteric and not particularly drama-filled issue, banks and their lobbyists have waged a vigorous campaign against the proposal. The effort even included a warning TV ad, set to a backdrop of mournful piano music, that the proposal families, farmers and the elderly will be reached.
Even within the Fed’s Washington-based board, the governors who must vote on the proposal have raised questions or expressed outright opposition on the steps, which were defended by Michael Barr, the Fed’s vice chair for administration, and his fellow bank regulators.
Mr. Powell has repeatedly signaled that changes are coming to the proposal.
“We hear the concerns, and I expect there will be broad and material changes in the proposal,” Mr. Powell said, saying the final product would have “broad support” within the Fed and more wide world.
He said the Fed had not “made that decision” to re-propose bank reform, but it was a “very devastating option.”
That’s big news: Banks are pushing the central bank to withdraw the proposal and issue a new version. The re-proposal would be a win for the industry, though it would also likely push the timeline for finalizing the rules — which is fraught with politics — to the 2024 election season.
