Federal Reserve Chairman Jerome Powell reiterated Wednesday that he expects interest rates to start falling this year, but is not yet ready to say when.
Powell said in prepared remarks for appearances on Capitol Hill on Wednesday and Thursday that policymakers remain mindful of the risks posed by inflation and do not want to ease too quickly. Stated.
“When considering adjustments to the target range for policy rates, we will carefully assess available data, developments in the outlook, and the balance of risks,” he said. “The Committee does not believe it is appropriate to lower the target range until there is greater confidence that inflation is on a sustained path toward 2 percent.”
These comments are taken directly from the Federal Open Market Committee’s statement after its most recent meeting, which ended on January 31st.
In a question-and-answer session with members of the House Financial Services Committee, Chairman Powell said he needed to “look at some more data” before considering interest rates.
“I think the strength of our economy, the strength of our labor market, and the progress we’ve made to date allows us to take that step cautiously, thoughtfully, and with greater confidence,” he said. . “Once we reach that confidence, which we expect to happen sometime this year, we can then begin to reduce restrictions on policy.”
Prices are likely to be higher during peak hours
Overall, the speech did not break any new ground regarding monetary policy or the Fed’s economic outlook. But comments showed officials are concerned about not losing progress on combating inflation and plan to base their decisions on future data rather than a preset course.
“We believe our policy rates are likely to have reached the peak of this tightening cycle,” Powell said in comments. “If the economy continues broadly as expected, we could see a reduction in policy restraint at some point this year.” It would be a good place to start.” “However, the economic outlook remains uncertain and continued progress towards the 2% inflation target is not guaranteed.”
He reiterated that cutting rates too soon risks losing the fight against inflation and will likely force further rate hikes, while waiting too long risks economic growth.
The market was widely expected to see the Fed ease aggressively, after raising interest rates 11 times by 5.25 percentage points from March 2022 to July 2023.
But those expectations have changed in recent weeks following several warning statements from Fed officials. At its January meeting, the Fed made clear in a statement that it would not cut interest rates yet despite the market outlook, contributing to the Fed’s increasingly cautious stance.
As it stands, futures market pricing suggests the first rate cut in June, part of four cuts this year totaling 1 percentage point. This is slightly more aggressive than the Fed’s forecast for three rate cuts in December.
inflation relief
Powell noted that despite the reluctance to continue lowering interest rates, the Fed has continued to work towards its 2% inflation target without upsetting the labor market or the broader economy.
“The economy has made significant progress toward these goals over the past year,” Powell said. He said inflation was “significantly easing” as “risks to employment and inflation targets are moving towards a better balance.”
The inflation rate, as measured by the Fed’s priority indicators, is currently running at an annual rate of 2.4%, but if you exclude food and energy, which are the core indicators that the Fed likes to focus on, it would be 2.8%. This figure reflects “a pronounced slowdown that has spread to both goods and services prices from 2022 onwards.”
“Long-term inflation expectations remain firmly stable, as reflected in a wide range of surveys of households, businesses and forecasters, as well as financial market indicators,” he added.
Mr. Powell is likely to face a range of questions during his two-day visit to Capitol Hill, starting with an appearance before the House Financial Services Committee on Wednesday and ending with the Senate Banking Committee on Thursday.
The Fed tries to stay out of politics, but a presidential election year presents special challenges.
Former President Donald Trump, who is likely to be the Republican nominee, was a fierce critic of Powell and others during his time in office. Some Democrats, led by Sen. Elizabeth Warren of Massachusetts, are pushing the Fed to cut interest rates as pressure mounts on low-income households to make ends meet.
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