Powell says Fed won’t rush to cut interest rates until inflation is conquered

Federal Reserve Chair Jerome Powell said Wednesday that policymakers expect to cut interest rates sometime in 2024, but are not ready to do so until they are confident inflation is tamed.

In remarks prepared for testimony before the House Financial Services Commitee, Powell said Fed officials are trying to balance the risks between cutting interest rates too soon, which risks setting off inflation again, or waiting too long to cut rates, which could weigh on the economy and possibly trigger a recession.

“We believe that our policy rate is likely at its peak for this tightening cycle,” he said. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”

The Fed chief is on Capitol Hill for the first of two days of his semi-annual monetary policy testimony. He is slated to appear before the Senate Banking Committee on Thursday.

FED HOLDS INTEREST RATES STEADY, SIGNALS IT IS NOT READY TO START REDUCING RATES

The Federal Open Market Committee voted during their January meeting to hold rates steady at a range of 5.25% to 5.5%, the highest level in 22 years. Although policymakers also cracked open the door to reducing rates this year, Powell told reporters during the post-meeting press conference that a March cut was unlikely. 

Most investors now expect the Fed to begin rate cuts in June and are betting the central bank will reduce borrowing costs between three to four times over the course of the year.

While inflation has cooled considerably in recent months, it remains up 3.1% compared to the same time a year ago, according to the most recent Labor Department data. 

FED’S FIGHT AGAINST INFLATION IS WEIGHING ON MIDDLE-CLASS AMERICANS

Policymakers have raised interest rates sharply over the past two years, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.

Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.

Yet the rapid rise in rates has not stopped consumers from spending or businesses from hiring. 

The labor market is continuing to chug along at a healthy pace, with employers adding 353,000 new workers in January – nearly double what economists expected. Job openings remain high, and the unemployment rate is continuing to hover around 3.7%.

Fed officials have said that higher interest rates are still working their way through the economy and will eventually weigh on growth. Until that happens, policymakers have indicated they will keep interest rates elevated.

This is a developing story. Please check back for updates.