The Federal Reserve is in no rush to cut interest rates,
according to Fed Chair Jerome Powell’s written 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 inflation didn’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.
