Federal Reserve Chair Jerome Powell in Washington, DC, in December 2023.
Washington, DC CNN —
TheFederal Reserveis in no rush to cut interestrates, according toFedChair JeromePowell’swritten testimony submitted to congressional lawmakers, released Wednesday. That means more pain for Americans, who have already faced almost two years of elevated borrowing costs on everything from car loans to mortgages.
However, it’s unlikely that there will be any rate hikes this year, Powell said.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell noted. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
That means rate cuts do remain on the table — if the economy cooperates.
The Fed chief is on Capitol Hill this week to deliver a semiannual report on the US central bank’s actions since the summer. He appears before the House Financial Services Committee at 10 am ET, then testifies to a Senate panel on Thursday.
Powell’s remarks cheered inflation’s remarkable slowdown over the past year, but he added that “the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured.”
“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” he said.
His comments come amid concerns from some on Wall Street that inflation’s descent might be stalling. Recent economic data showed that price pressures persisted in January, leading investors to recalibrate their expectations for rate cuts this year.
Markets are now pricing in the first rate cut to come in the summer, according to futures — a shift from the beginning of the year when investors bet that the first cut could come in the spring.
Still, the timing and pace of rate cuts remains up in the air. What’s clear is that Fed policymakers broadly agree that they want to see more steady progress in the coming months.
The latest Consumer Price Index showed that inflationdidn’t ease in January as much as investors were expecting, which led to markets tumbling briefly that week. Then, the Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — similarly showed that price increases didn’t slow as much as in prior months. In fact,prices rose in January from December at the fastest clip in months.
The Fed has seen some substantial progress in taming price increases since kicking off a historic inflation-busting campaign two years ago. But now the central bank is facing the difficult task of balancing the risk of cutting too soon with the risk of cutting too late. There are consequences in both scenarios.
Too soon to cut rates?
The Fed slows inflation by weakening demand through rate hikes. After the Fed began to rapidly lift rates in March 2022, the US economy is still on strong footing. Some think that means there’s more of a risk that inflation could stall, or even reignite, as robust spending maintains upward pressure on prices.
“Services prices have remained red hot because they are not rate sensitive,” José Torres, senior economist at Interactive Brokers, told CNN. “Young people are delaying homeownership because it is so expensive given the high rates, so that’s making it where folks have less of a propensity to save and instead spend all their money on services.”
Economic growth in the fourth quarter registered at a robust 3.2% annualized rate, with consumer spending running at a solid clip, a few steps down from the blistering 4.9% in the third quarter, but still robust by historical standards. Growth likely remained solid in the beginning of the year, too. The Atlanta Fed is currently projecting first-quarter gross domestic product to come it at a healthy 2.1% annualized rate.
If that’s the case, then that shows there’s been a clear slowdown since the summer when Americans splurged on concerts, films and goods. Fed officials have said they want to see more of the same: A slower economy and slower inflation.
On rate cuts, Atlanta Fed President Raphael Bostic said recently he “would probably not anticipate they would be back to back.” He cautioned that cutting rates too soon would prompt businesses to ramp up their investment and spending, making it even harder to reach the Fed’s 2% inflation target.
“This threat of what I’ll call pent-up exuberance is a new upside risk that I think bears scrutiny in coming months,” he said. “ As my staff and I have talked to business decision-makers in recent weeks, the theme we’ve heard rings of expectant optimism.”
If the economy remains robust and inflation doesn’t continue to wane, that could also mean no rate cuts this year. In a recent interview with CNBC, Richmond Fed President Thomas Barkin said “we’ll see” if the Fed cuts rates in 2024.
“I’m still hopeful inflation is going to come down, and if inflation normalizes then it makes the case for why you want to normalize rates, but to me it starts with inflation,” he said.
The risk of cutting too late
Fed officials are also attuned to the possibility that the US economy could weaken if they don’t cut interest rates soon enough. That’s because if rates remain elevated but inflation continues to slow, inflation-adjusted interest rates would be rising, putting the economy in a stranglehold.
The Fed is also mandated by Congress to maximize employment.
“If you look historically, we’re high. And the longer we stay at that — if inflation continues falling — we’re going to have to start thinking about the employment side of the mandate,” Chicago Fed President Austan Goolsbee told CNBC in an interview last week. “How long do we want to stay in that restrictive environment? The answer, I think, should be: Only as long as we have to, that we’re convinced that we’re on path to get to the target inflation.”
There aren’t any glaring signs of a rapidly weakening economy just yet, with growth staying solid and unemployment still low. That also means that there’s a very real possibility that the Fed could defeat inflation without triggering a recession, an extremely rare feat known as a soft landing.
“I am cautiously optimistic that we will see continued progress on disinflation without significant deterioration of the labor market,” Fed Governor Adriana Kugler said last week at a conference at Stanford University.
