March 6 (UPI) — Federal Reserve Chair Jerome Powell told the House Finance Committee Wednesday that it was still too early for the central bank to consider interest rate cuts.
In prepared opening remarks, Powell said the Fed “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%.”
As always, he said, the Fed’s actions depend on the economic data.
Powell noted, however, that inflation has eased substantially and that has happened without a significant increase in unemployment. Strong job creation, Powell said, has been accompanied by near-historical low unemployment at 3.7%.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell said. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
But he added that the economic outlook is uncertain and continued progress toward the Fed’s 2% inflation target is not guaranteed.
“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%,” Powell said. “At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Powell said the U.S. economy expanded at a strong pace over the past year. He said gross domestic product increased 3.1% in 2023, boosted by solid consumer demand and improving supply conditions.
He said while the labor market remains tight, supply and demand have continued to “come into better balance.”
Markets moved higher ahead of the testimony.
Powell’s House testimony focused on domestic economic trends, longer-term Federal Reserve policy goals and monetary policy, as well as the Fed’s economic projections.
He will speak to the Senate Banking Committee on Thursday.
Stock futures were up Wednesday morning and Treasury yields were a bit higher following Tuesday’s stock market sell-off.
Nicholas Colas, co-founder of DataTrek Research, dismissed speculation that Tuesday’s stock market decline was related to what Powell will have to say before Congress Wednesday.
“If someone really ‘knew’ what Powell was going to say Wednesday morning, they would not solely express that information with stock trades,” Colas wrote. “They would be shorting bonds, which would push the futures market to discount fewer rate cuts.”
When Friday’s jobs report comes out, the data will provide more indications of potential Fed interest rate cuts.
A continuing hot jobs market would likely prompt the Fed to hold interest rates steady, while a significant weakening of the jobs market could lead to cuts.
Principal Asset Management’s Seema Shah told CNBC that unless the labor market cools, inflation progress will stop. And without inflation progress, Fed interest rate cuts are not likely.
In advance of Powell’s testimony, economists were looking to what monetary policy will look like and whether inflation rates are still easing as they anticipate if, when and by how much interest rates might be cut this year.
According to Fed officials, at least some interest rate cuts are expected this year, but they have not indicated when as they continue to monitor economic data on inflation as well as the job market.
The Fed remains committed to returning inflation to the 2% target so inflation data that will likely drive whether interest rates are cut.
