Win McNamee
While the Federal Reserve's restrictive monetary policy is putting pressure on economic activity and inflation, cutting interest rates too soon could cause damage, Fed Chair Jerome Powell will say on Wednesday in his testimony at the House Financial Services Committee hearing.
"Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2%," he will say, according to prepared text for his opening statement.
But there's also risk in waiting too long to cut rates. "At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment."
"Powell has pretty much remained on target and has pretty much stayed on script from his previous remarks," said Investing Group Leader Mott Capital Management's Michael Kramer. "He again emphasizes it may be appropriate to cut rates this year if the economy calls for it all, although he seemed to put some distance around the dot plot from the December FOMC meeting." (added 11:56 AM ET.)
Hearing concludes at 12:57 PM ET.
12:41 PM ET: Fewer than 500 banks are participating in the FedNow real-time payment system, Powell said.
12:12 PM ET: The Fed's practice of paying interest on the reserves that banks keep at the Fed, or IOER, doesn't affect banks' incentive to lend, because banks earn more from lending than they do from the interest on their reserves, Powell said.
12:01 PM ET: The Fed has not decided on whether it will re-propose the Basel III endgame proposal. Powell thinks the Fed will reach a broad consensus on the proposal.
11:59 AM ET: Growth in the economy is likely a contributor to the record amount of credit card debt, Powell said.
11:50 A ET: The comments made in response to the Basel III endgame proposal were "voluminous" and "quite detailed" with analysis, and that's what the Fed wanted, Powell said. The Fed is just starting to consider what changes it will make to the proposal.
11:46 AM ET: The lower demand for office space, and related downtown retail space, has been a shock to the system. The Fed has been talking to banks with high exposure to those sectors, and working with them to make sure they're prepared. "It's not the very large banks," he said. Still, "it's a serious problem" that the Fed will work through.
11:36 AM ET: Specifically, the Fed is "just looking for more, good, low inflation readings" before it's ready to cut interest rates. The strength of U.S. economy allows the central bank the time to be careful in making its next move, he added. They don't plan on waiting for inflation to reach 2% before easing policy.
11:23 AM ET: Executive incentive compensation played a very small part in Silicon Valley Bank's failure, Powell said. Executives of a bank should not profit from its failure.
11:08 AM ET: "We're very focused on AI like many government agencies and many law enforcement agencies," Powell said when asked about the risk of artificial intelligence technologies to the banking system.
11:02 AM ET: Powell still sees commercial real estate risks for banks as "manageable." The risk will be "around with us" for several years, therefore it's important that banks be prepared, he said.
10:51 AM ET: "What we're seeing so far this year is the economy is growing at a pace... There's no evidence that the U.S. economy is falling into a recession" in the short term. He thinks there's a possibility of achieving growth, keeping the labor market strong, and getting inflation to get to the Fed's 2% goal. "We're on a good path to get there."
10:36 AM ET: There will be a "thoughtful, deliberate process" in considering implications to the Basel III endgame proposal on other banking rules, including the requirement of 6% long-term debt for regional banks.
10:30 AM ET: The Federal Reserve is in regular contact with the Justice Department concerning Capital One's (NYSE:COF) proposed acquisition of Discover Financial (NYSE:DFS). The central bank has not yet received the application for the merger, he said.
10:27 AM ET: He expects "broad and material changes" to the Basel III endgame proposal for banks. It's better to get the capital proposal right than fast, he said.
Update at 10:25 AM ET: When asked about the potential number of rate cuts this year, Powell said, it "will depend upon the economy." As to what it will take to start cutting rates, and how much more confidence the Fed needs that inflation is heading toward its goal, "We have some confidence in that... We want to see a little bit more data."
The remarks echo statements Fed officials and Powell have made since the central bank's last monetary policy meeting.
While he repeated that it will likely be appropriate to "begin dialing back policy restraint at some point this year," Powell repeated that the Federal Open Market 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%."
In January, total personal consumption expenditures ("PCE") prices rose 2.4% Y/Y; excluding food and energy, core PCE prices increased 2.8%, both still above the Fed's 2% goal but significantly down from its peak of 5.6% in summer of 2022.
Also, he repeated that the FOMC believes that the policy rate is likely at its peak for this tightening cycle, indicating it's not considering a hike at this point.
As usual, Powell says the committee's decisions will depend on the economic data. "In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks," he said.
Traders are now betting that the first rate cut will occur at the Fed's June meeting, with a 58.8% probability of a 25 basis-point cut to 5.00%-5.25%, according to the CME FedWatch tool. One month ago, there was a 51.2% probability of the policy rate falling to 4.75%-5.00%.
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