Powell: Fed Holds Expectations for Interest Rate Cuts And There Is No Reason To Assume That Recession Is Near
Strong inflation and employment data in January did not alter the Federal Reserve's expectation of interest rate cuts in the second half of this year. Still, it has indeed made Fed officials, including Chairman Jerome Powell, more cautious about the timing of the cuts. At least they hope to have more evidence that inflation is indeed slowing before they start to act.
During a hearing at the U.S. Congress yesterday, Powell told the House Financial Services Committee that a rate cut would not be guaranteed unless officials could confidently say inflation is sustainably moving towards the 2% set target.
We want to see a little bit more data so that we can become confident, said Powell. However, We're not looking for better inflation readings than we've had. We're just looking for more of them.
Since last fall, Fed officials have been trying to maintain a delicate balance on interest rates: they don't want the economy to be burdened by the current rates, or even higher, for a long time. Still, they also don't want to loosen policy too early, keeping inflation far above their 2% target.
Reducing policy restraint too soon or too much could...ultimately require even tighter policy to get inflation back to 2%, Powell said, At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.
In the past two years, to combat inflation that has jumped to a 40-year high, the Fed has also chosen to raise interest rates at the fastest rate in the past 40 years. After July last year, as inflation slowed, officials kept their benchmark federal funds rate in the range of 5.25% to 5.5%.
However, under a series of rate hikes, other borrowing costs affected by the federal funds rate, such as mortgages, credit cards, and commercial loans, also reached the highest point in 23 years. This has all planted instabilities in the current economic situation. Therefore, at the hearing, Republicans criticized the Fed's plan to raise capital requirements for major banks, while Democrats pleaded with him to lower borrowing costs.
But Powell told lawmakers, We are on a good path so far to be able to get there. And that there is no reason to think that the U.S. economy will face the risk of recession. Therefore, the Fed will continue to focus on combating inflation while maintaining robust growth and a healthy labor market.
On the specific node of the Fed's starting to cut interest rates that everyone is concerned about, Powell did not give a definitive answer, just suggested that given the strong momentum of the economy and labor market, and the progress that has already been made, the Fed can take this step carefully and thoughtfully.
At the hearing, Powell also indicated that the Fed would make major changes to the Basel Endgame plan aimed at enhancing the risk resilience of the financial system to help large banks raise funds better.
I do expect that there will be broad and material changes to the proposal, said Powell. He said that the Fed might issue a new proposal and decide when it should take effect again.
Powell promised that the final plan would receive broad support from the Fed's voting committee.
The latest proposal emerged last July, aiming to prevent a series of risks, including potential losses caused by cyber-attacks, more clearly and consistently. However, this proposal has been strongly opposed by the banking industry, as they believe stricter regulation would harm consumers, small businesses, and the economy, and have asked regulators to overturn the original plan and introduce a new one.