What We Learned From Fed Chair Jerome Powell This Week

Twice a year, the chair of the Federal Reserve testifies on Capitol Hill, and investors tune in for any tidbits and insights into what’s to come for monetary policy.

This week’s appearance of Chair Jerome Powell before the House Financial Services Committee and the Senate Banking Committee gave us just that.

In his testimony, Powell emphasized the persistent threat inflation poses to the economy and the risk of cutting prematurely. However, he also acknowledged the substantial progress the Fed has made.

Rate Cuts Are Coming

First things first, Powell believes that interest rates will be cut in 2024. “It will likely be appropriate to begin dialing back policy restraint at some point this year,” he said.

Around the turn of the year, investors had been hopeful that rate cuts could start as early as this month, but reality soon caught up with them. Stronger-than-anticipated GDP growth, solid labor market gains, and an uptick in January inflation didn’t exactly paint a picture of an economy in need of easier monetary policy.

Inflation rose 3.1% year-over-year in January, per the consumer price index (CPI), well above the Fed’s 2% target. Powell reiterated the central bank’s commitment to the target on Capitol Hill this week, and said he did not expect any interest rate cuts until there’s confidence inflation was sustainably headed to that level.

Data Dependent

The Fed has raised the federal funds rate — a key driver of borrowing costs across the board – 11 times in this tightening cycle to a multi-decade high. Despite this, the labor market and economy have remained resilient, boasting more jobs and higher growth than expected. This resilience is allowing the Fed to take a more careful and patient approach to interest rates. Investors now expect the first rate cut could happen at the central bank’s June meeting, according to the CME’s FedWatch Tool.

With the economy so strong, Powell believes cutting rates too soon could lead to a resurgence in inflation, which could in turn potentially justify additional rate hikes.

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