Federal Reserve Chairman Jerome Powell told House lawmakers on Wednesday that interest rate cuts are likely “at some point” in 2024, and that he is open to big changes to the controversial proposal that would require banks to hold more capital.
The central bank chief covered a number of topics during three hours of testimony before the House Financial Services Committee, touching on everything from immigration to commercial real estate to housing.
However, two topics dominated: monetary policy and bank regulation.
Powell explained that he still expects cuts “at some point this year” even after some hot readings on inflation, while also warning that the Fed will take its time.
“We want to see more data,” he added during the question-and-answer session.
Powell also made clear on Wednesday that he expects “broad and substantive” changes to the Fed's proposed rule that would require the largest U.S. lenders to maintain greater buffers against future losses.
The rule, the most aggressive change in how banks are regulated since the 2008 financial crisis, has been criticized by Republicans, some Democrats and many banks.
“It's more important that we get this right than it is that we get it fast,” he said of the proposal, known as the Basel III endgame.
He did not rule out responding to calls to withdraw the idea and start over by repeating the proposal.
“If this turns out to be the right thing, we will not hesitate to do it,” Powell said.
Read more: What the Fed's interest rate decision means for bank accounts, CDs, loans and credit cards
Lawmakers from both parties, including House Financial Services Chairman Patrick McHenry of North Carolina, focused on bank capital rules during their questioning of the Fed chief.
“Regulators should pull them back and start over,” McHenry said of these capital rules.
At another point, Powell acknowledged the overwhelming volume of feedback his agency received on the proposal, saying it was “unlike anything I've seen.”
Democratic Party member Maxine Waters from California focused on housing in her remarks, saying it is the number one driver of inflation.
“Until we address the underlying housing shortage, inflation will remain very high,” she said.
Powell responded that he was indeed monitoring the issue but housing was one of several measures he was focusing on, saying the “overarching story” was lower inflation overall.
At other times, he commented on topics such as the role of immigration in the economy, last year's bank failures, the potential impact of artificial intelligence in financial services, and the challenges banks face from exposure to commercial real estate issues.
He said commercial real estate was a “manageable” issue for mid-sized banks although he expected some losses.
He added that it is a problem that the central bank will work to solve “for several years.”
He also commented on the broader economy, often stressing that economic developments in the coming months could go in different directions and change the central bank's next steps.
“The pandemic is still writing the story of our economy at the moment and we must be prepared to be surprised by the next chapter, as happened with 2023,” he said.
'has bumps'
Powell's testimony before House lawmakers comes two weeks before the central bank's next policy meeting, when officials are widely expected to keep interest rates steady for a fifth straight meeting.
The Fed last raised interest rates in July 2023 to a range of 5.25%-5.5%, the highest level in 22 years, as part of the most aggressive campaign to cool inflation since the 1980s.
Powell first indicated in December that the Fed was likely to focus on interest rate cuts in 2024, and his colleagues expected to reach consensus on three cuts this year. This led many investors to predict that the first cut would occur in March.
But in the first two months of 2024, Powell and some of his Fed colleagues have been warning the public about how quickly monetary easing could begin, pushing expectations of cuts to later in the year.
Some higher-than-expected inflation readings and strong jobs numbers have reinforced this cautious approach.
First, the Consumer Price Index (CPI) in January was hotter than economists expected, as was the Producer Price Index (PPI), which tracks the prices companies pay to manufacture products and services.
Then last week, the Fed's preferred measure of inflation — the core personal consumption expenditures index — rose 0.4% from the previous month, marking the biggest jump since January 2023.
The monthly increase represents a stark shift in inflation data. On a six-month annualized basis, the core personal consumption expenditures rate is now 2.5%, up from the 1.9% level it occupied in the previous two reporting periods.
Several Fed officials have recently warned that the road toward the Fed's 2% target will be “bumpy,” and have suggested that cuts could come now in the summer or “later this year.” This puts the Fed on a collision course with the presidential election in November.
Powell highlighted the Fed's dilemma in his remarks on Wednesday. He said cutting interest rates too early could halt the unjustified progress made in lowering inflation so far. The Fed also doesn't want to keep interest rates high for too long to weaken the economy, he added.
Investors appear to be listening to the Fed's dovish comments. They now expect the first rate cut to take place in June instead of March. They also expect three this year, after starting the year with a total estimate of six.
But that timeline could slip further if progress in inflation stalls or the labor market and wages continue to exceed expectations. One prominent economist has already predicted that the Fed will not raise interest rates at all this year.
“The economic outlook is uncertain, and continued progress toward the 2% inflation target is not guaranteed,” Powell said in his remarks on Wednesday.
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