Powell: Federal Reserve Needs more Confidence on Inflation

Federal Reserve Chairman Jerome Powell assured lawmakers that the US central bank will not rush to cut interest rates until monetary policy makers are convinced that they have won their battle over inflation.

In his prepared testimony before a House committee on Wednesday, the Fed Chairman said it would likely be appropriate to start lowering borrowing costs “sometime this year,” but made clear that they (monetary policymakers) are not ready yet.

These statements reiterate the message from all Fed officials over recent weeks: The economy and labor market are strong, which means monetary policymakers have time to wait for more evidence that inflation is heading towards their target before cutting interest rates.

“The Committee does not anticipate that it would be appropriate to lower the target range until it has gained greater confidence that inflation is moving sustainably toward 2%,” he said in brief remarks prepared for testimony before the House Financial Services Committee at 10 a.m. Wednesday.

The Fed chair is on Capitol Hill for the first two days of his semiannual testimony on monetary policy, and is scheduled to appear before the Senate Banking Committee on Thursday.

Federal Reserve officials are in the final rounds of the fierce battle to contain inflation. After raising the Fed's benchmark funding rate by more than five percentage points starting in March 2022, they kept interest rates at the same levels since July amid easing price pressures.

Central bankers are now debating when and by how much to cut interest rates. Officials fear that an early cut will lead to increased economic activity that keeps inflation above 2%, a rate they see as appropriate for a healthy economy. On the other hand, keeping borrowing costs high for too long risks pushing the economy into recession.

“We believe that the interest rate may have peaked in this tightening cycle,” Powell said in his prepared remarks, repeating the tone used at his last news conference on January 31. “If the economy develops broadly as expected, it will likely be appropriate to start... "Monetary policy restrictions will be eased sometime this year. But the economic outlook is uncertain, and continued progress toward achieving the 2% inflation target is not guaranteed."

Inflation slowed to 2.4% for the 12 months to January, down from its peak of 7.1% in June 2022. But price pressures accelerated from December, and the key indicator Powell often cites — prices for services excluding shelter and energy — remains above rates before the pandemic.

Meanwhile, demand for workers remained strong, with employers adding 353,000 jobs in January, and economists expect another 200,000 jobs to be added in February.

Fed officials said higher interest rates will continue to trickle down the economy and eventually slow growth, which has been surprisingly strong over the past year. However, some analysts raised their estimates for economic output in the first quarter, due to expectations of higher consumer spending.

Accelerating inflation dashes Wall Street's hopes for a rate cut soon

Monetary policymakers have responded to the sudden strength of the economy by signaling that they will keep interest rates at high levels, and once they start lowering them, they will likely lower them at a slower and perhaps less regular pace than in the past.

Since their meeting in January, officials have strongly rejected expectations that they would cut interest rates at their meeting on March 19-20. Investors are now betting that the first rate cut will occur in June. They also expect to cut rates three and four times this year, in line with Fed officials' average forecast in December. Monetary policymakers will issue their updated forecasts at their meeting this month.

Meanwhile, Democratic lawmakers are running out of patience with the US central bank ahead of the November elections. Sherrod Brown, the chairman of the Senate Banking Committee who is locked in a tough re-election battle in Ohio, urged the Fed to cut interest rates “early this year” in a January 30 letter to Powell, arguing that high interest rates hurt small businesses. Home ownership is difficult for many Americans.