Federal Reserve Chair Jerome Powell plans to tell House lawmakers Wednesday that interest rate cuts are likely “at some point” in 2024, but that the central bank will proceed cautiously as it evaluates whether inflation is cooling appropriately.
“If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year,” Powell said in a copy of his prepared remarks to the House Financial Services Committee.
The group at the Fed that decides whether rates go up or down “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 the Fed’s goal of 2%, he added in his remarks.
Powell’s testimony before House lawmakers at 10 a.m. ET comes two weeks ahead of the central bank’s next policy gathering, where officials are widely expected to hold rates steady for the fifth consecutive meeting.
Officials last raised rates in July 2023 to a range of 5.25%-5.5%, a 22-year high, as part of the most aggressive campaign to cool inflation since the 1980s.
Powell first signaled in December that the Fed would likely pivot to rate cuts in 2024, and his colleagues predicted a consensus of three cuts this year. That prompted many investors to predict the first cut would happen in March.
But in the first two months of 2024 Powell and some of his Fed colleagues have been cautioning the public about how soon monetary easing could begin, pushing out expectations for cuts to later in the year.
Some higher-than-expected readings on inflation and strong jobs numbers only 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 businesses pay to manufacture products and services.
Then last week the Fed’s preferred inflation measure — the core Personal Consumption Expenditures (PCE) index — rose 0.4% compared with the prior month, marking the biggest jump since January 2023.
The monthly increase marked a stark shift in the inflation data. On a six-month annualized basis, core-PCE now sits at 2.5%, up from the 1.9% level it occupied in the previous two reporting periods.
Several Fed officials have warned recently that the path down to the Fed’s 2% target will be “bumpy,” and they suggested cuts could now come in the summer or “later this year.” That places the Fed on a collision course with the presidential election in November.
Powell highlighted the Fed’s dilemma in his prepared remarks Wednesday. Lowering rates too soon, he said, could halt undue progress made in getting inflation down so far. But the Fed also doesn’t want to hold rates high for too long so as to weaken the economy, he added.
Investors are now listening to the Fed’s cautious commentary. They are now expecting the first rate cut in June instead of March. They also expect three for the year, after starting the year thinking a total of six.
But that timeline could slip further if progress on inflation stalls or the job market and wages continue to beat expectations. One prominent economist has already predicted that the Fed won’t raise rates at all this year.
“The economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured,” Powell said in his prepare remarks Wednesday.
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