Federal Reserve Chair Jerome Powell on Wednesday signaled that rate cuts are coming this year, sticking to the Fed’s cautious script about slashing rates too quickly before it has a sustained handle on inflation.
“In our pursuit of our dual mandate, the Federal Reserve remains steadfast in promoting maximum employment and stable prices for the American people,” Powell said Wednesday morning in prepared remarks during his semi-annual testimony before lawmakers on the House Financial Services Committee in Washington, D.C.
Powell’s rate-cutting reassurance has Wall Street investors breathing a little easier, with stocks surging following his testimony, according to a Bloomberg report.
The Fed chair went on to recommit to the Fed’s long-held goal of returning inflation to 2% and said that restoring stability in consumer prices is “essential to achieve a sustained period of strong labor market conditions that benefit all.”
“The Committee remains highly attentive to inflation risks and is acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials, like food, housing and transportation.”
Although Powell conceded that labor market conditions are relatively tight, nodding to strong job creation and historically low unemployment rates, sluggish wage growth and an ongoing gap between job openings and available workers are still areas of concern, he noted.
Inflationary risks receding, but economy isn’t out of the woods yet
Powell acknowledged the progress made in the economy over the past year, noting, “While inflation remains above our objective of 2%, it has eased substantially, and unemployment hasn’t seen a significant increase.”
He pointed out that core Personal Consumption Expenditures (PCE) prices rose by 2.8% in January. That’s a notable slowdown from a year ago when it rose by 4.7% in January 2023 from the previous year.
The Fed chief emphasized the central bank’s vigilant stance regarding inflation risks, recognizing the challenges it poses, particularly for the most vulnerable households. He also outlined that economic activity expanded robustly in 2023, driven by solid consumer demand.
However, he acknowledged that the housing market saw suppressed growth in 2023 due to higher mortgage rates, and that elevated interest rates impact business investment. Existing-home sales fell 19% in 2023 from the previous year to 4.09 million, according to data from the National Association of REALTORS®. That’s the lowest level in nearly 30 years.
In his testimony, Powell underscored the Federal Reserve’s maintenance of a tight monetary policy stance, keeping the federal funds rate target range at 5.25% to 5.5%.
“We believe our policy rate is likely at its peak for this tightening cycle,” Powell said. “However, the economic outlook is uncertain, and progress toward our 2% inflation objective is not assured.”
He went on to say, “Reducing policy restraint too soon or too much could result in a reversal of progress in inflation, while reducing it too late or too little could unduly weaken economic activity and employment.”
Powell signals willingness for significant changes to Basel III endgame proposal
Ahead of Powell’s appearance, House Republicans on the Financial Services Committee sent a letter to Powell and other banking regulators demanding that they withdraw their “fatally flawed” Basel III endgame proposal.
The Basel III endgame proposal, introduced in July 2023, is a rule-making overhaul for big banks with $100 billion or more in assets on how much money they need to keep on hand as a cushion if they run into liquidity issues.
Here are the key elements of the Basel III proposal:
- More required capital: An average increase of 16% in the highest-quality capital (equity, plus retained profits) for big banks.
- Less decision-making flexibility: The proposal standardizes risk weightings for different loan types, potentially reducing a bank’s discretion in assessing mortgage risk.
- Potential to restrict mortgage credit availability: Industry groups like the American Bankers Association (ABA) and the Mortgage Bankers Association (MBA) argue the proposal’s risk weights for mortgages are excessive. They argue that this has the potential to drive up borrowing costs and reduce the availability of mortgage credit for some borrowers, especially low- and middle-income earners.
The proposal has garnered strong bipartisan opposition and pushback from the banking and mortgage industries who all argue that a more thorough economic impact analysis is needed to evaluate how the changes would impact the economy.
Opponents also contend that the proposal language could lead to reduced access to mortgage lending at a time when the housing market is already in a precarious position due to affordability pressures.
Several lawmakers pressed Powell on his stance on the Basel proposal during a Q&A portion of the hearing. When asked if the Fed would consider making substantial changes to the proposal, Powell said the concerns are being heard, and he indicated that regulators are open to making changes.
“I do expect that there will be broad and material changes to the proposal,” Powell told the Committee. “I’ll add that I am confident that the final product will be one that does have broad support both at the Fed and in the broader world.”
