Fed Chair Powell still expects to cut rates this year, but not yet

Federal Reserve Chairman Jerome H. Powell said on Wednesday that he thought the Fed would begin to cut borrowing costs in 2024, but policymakers needed to gain “a lot of confidence” before inflation made a move.

During testimony before the House Financial Services Committee, Mr. “If the economy continues to grow broadly as expected, it will be appropriate to begin easing policy restraint at some point this year.”

Mr. on economic policy. Powell's comments were in line with what markets were expecting. Policymakers have raised interest rates in 2022 and 2023 to slow growth and tame inflation, and have signaled for months that they may begin cutting those rates soon as prices pick up. Fed officials have made it clear that they do not want to cut borrowing costs early and are keeping their options open over time.

But Mr. While Powell didn't say anything 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 central bank oversees the nation's largest banks with an eye toward maintaining financial stability. During his testimony on Wednesday, Mr. Powell has faced several questions about key banking regulations proposed by the Fed and other regulators last year, dubbed the “Basel III endgame.”

Lobbyists representing America's largest banks have loudly insisted that major changes are coming to the proposed rules, and that the “most plausible option” is for regulators to reissue them entirely.

While the big news during the investigation into banking regulation has been on the rise, investors have seen Mr. Powell's testimony was closely watched. What they got was a continuation of the central bank's message for months: rate cuts are coming, but the central bank wants to be cautious about making them.

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“What we've seen so far is that the economy is growing at a solid pace,” said Mr. Powell said, even as inflation eased sharply. “So those are the conditions that we see — they're very attractive conditions — and we're trying to use our policies to continue that growth and keep that labor market strong while also making further progress on inflation.”

Central bank policymakers have quickly raised interest rates from March 2022 to July 2023, where they currently sit between 5.25 percent and 5.5 percent. This has made mortgages, business loans and other forms of credit more expensive, helping to put the brakes on an economy that otherwise maintains considerable momentum.

Officials have signaled they could cut interest rates several times this year, and Wall Street is trying to gauge when those moves will begin.

The central bank next meets on March 19-20, but some investors expect officials to cut interest rates at that meeting. Markets view the Fed's June meeting as a Most likely candidate For the first interest rate cut, central bankers are betting that borrowing costs could triple or quadruple by the end of the year.

The Fed chief warned against cutting rates, noting that “reducing policy too soon or too much could reverse the improvement we've seen in inflation and ultimately require even tighter policy.”

While inflation has eased, it is well above the central bank's 2 percent target.

The central bank's preferred measure of inflation rose to 2.4 percent on an annual basis in January, well below its peak of nearly 7 percent. The size is high 2.8 percent After removing volatile food and fuel prices to get a clear reading of the inflation trend. (A separate but related measure of inflation, the consumer price index, peaked in 2022 and There is little and higher.)

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However, Mr. Powell acknowledged that there may be risks in waiting too long to cut interest rates, as “reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

So far, even as the job market has remained strong, progress has come on firm hiring and cooling Unemployment is rampant 3.7 percent, low by historical standards.

Central bank officials hope their policy will help bring the economy back into balance, allowing inflation to return to normal. For example, the number of job openings has declined in the past year, and wage growth is cooling as companies compete less aggressively for employees. This may leave firms with less incentive to raise prices to cover rising costs.

In the labor market, “supply and demand conditions continue to come into better balance,” said Mr. Powell noted.

While some lawmakers asked about the labor market and inflation, the central bank's chief fielded several questions about the central bank's hot-button plan to increase banking regulation, the central bank's “Basel III endgame.”

The proposal, a U.S. version of the international standard, would make several changes to banking supervision that would ultimately increase the amount of capital — the financial buffer — that big banks must maintain.

Although regulation is generally a mysterious and not particularly dramatic issue, banks and their lobbyists have waged a fierce campaign against the plan. The initiative also includes a TV commercial alert, set to a sinister piano music background proposal It costs families, farmers and the elderly.

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Even within the Fed's Washington-based board, the governors who must vote on the proposal have raised questions or He was totally against it For actions supported by Michael Barr, the Fed's vice chairman for supervision, and his fellow bank regulators.

Mr. Powell has repeatedly signaled that changes to the plan are coming.

“We are listening to the concerns, and I expect there will be broad and material changes to the plan,” said Mr. Powell said the final product would have “broad support” in the Fed and the wider world.

He said the central bank had “not made that decision” to re-propose banking reform, but said it was a “very plausible option”.

That's big news: Banks are pressuring the central bank to withdraw the proposal and issue a new version. A re-proposal would be a win for the industry, although it would push the deadline for finalizing the rules — which are politically fraught — into the 2024 election season.

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