Federal Reserve Chairman Jerome Powell testified at a House Financial Services Committee hearing titled “The Federal Reserve’s Semiannual Monetary Policy Report” at Rayburn House on Wednesday, June 21, 2023.
Tom Williams | Chongqing Roll Call Company | Getty Images
Federal Reserve Chairman Jerome Powell reiterated on Wednesday that he expects interest rates to begin falling this year but was not ready to say when.
In speeches prepared for congressionally mandated appearances on Capitol Hill on Wednesday and Thursday, Powell said policymakers remain concerned about risks from inflation and don’t want to ease up too quickly.
“In considering any changes to the policy rate target range, we will carefully assess incoming data, the evolving outlook, and the balance of risks,” he said. “The Committee expects to become more confident that inflation is sustainably moving toward 2 percent.” Previously, lowering the target range was not appropriate.”
The remarks were taken verbatim from a statement issued by the Federal Open Market Committee after its most recent meeting, which ended on January 31.
Interest rates may reach a peak
Overall, the speech did not break new ground on monetary policy or the Fed’s economic outlook. However, they said officials remained concerned about losing progress in fighting inflation and would make decisions based on incoming data rather than a preset course.
“We believe our policy rates are likely to peak during this tightening cycle. If the economy develops broadly as expected, it may be appropriate to begin easing policy restrictions at some point this year,” Powell said in comments. “But the economic outlook There is uncertainty and we cannot ensure continued progress towards the 2% inflation target.”
He again pointed out that cutting interest rates too quickly could lead to failure in the fight against inflation and may have to raise interest rates further, while waiting too long would pose a danger to economic growth.
The market generally expects that the Federal Reserve will significantly loosen interest rates after raising interest rates 11 times between March 2022 and July 2023, with a total increase of 5.25 percentage points.
However, those expectations have changed in recent weeks after several warning statements from Fed officials. The January meeting helped solidify the Fed’s cautious approach, with a statement making clear it would not cut interest rates despite the gloomy market outlook.
As it stands, futures markets are pricing in the first rate cut coming in June, part of four cuts this year totaling a full percentage point. This is slightly more aggressive than the prospect of three interest rate cuts by the Federal Reserve in December.
Inflation eases
Despite facing resistance to cutting interest rates, Powell noted that the Fed took action to achieve its 2% inflation target without affecting the labor market and the broader economy.
“The economy has made great progress over the past year toward achieving these goals,” Powell said. He noted that inflation has “moderate significantly” as “risks to achieving the employment and inflation goals have become better balanced.”
The inflation rate based on the Fed’s preferred indicator is currently 2.4%. If you exclude food and energy from the core data that the Fed prefers to focus on, the inflation rate is 2.8%. The figures reflect “a significant slowdown in prices of goods and services generally since 2022.”
He added: “Longer-term inflation expectations remain well anchored, as reflected in broad surveys of households, businesses and forecasters, as well as measures in financial markets.”
Powell is likely to face a variety of questions during his two-day visit to Capitol Hill, which begins with a hearing before the House Financial Services Committee on Wednesday and ends with a hearing before the Senate Banking Committee on Thursday.
While the Fed tries to stay out of politics, a presidential election year presents special challenges.
Former President Donald Trump, the likely Republican nominee, was fiercely critical of Powell and his colleagues during his time in office. Some congressional Democrats, led by Massachusetts Sen. Elizabeth Warren, have called on the Fed to lower interest rates as low-income households face pressure to make ends meet.
