Fed Refuses To Cut Interest Rates Unless This Happens

While the Federal Reserve Bank is likely to cut interest rates at some point in 2024, Chair Jerome Powell said Wednesday that wouldn’t happen until policymakers are ultimately confident that inflation is finally tamed.

In prepared remarks he gave before the House Financial Services Committee this week, he said:

“The 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%.”

The remarks were part of the monetary policy testimony, which he gives over two days twice each year. He appeared before the House committee on Wednesday and then was set to appear on Thursday before the Senate Banking Committee.

Wall Street has expressed some concern in recent weeks that inflation is stalling. It has fallen quite considerably from the 9.1% peak that it reached, but progress on reducing inflation at a significant rate has stalled since last summer.

In the last two years, Fed policymakers have increased interest rates sharply, with 11 different rate hikes approved as a way to crush inflation and overall cool the economy.

Over 16 months, interest rates went from near zero rates to higher than 5%. That marks the fastest pace of interest tightening since back in the 1980s

Officials at the Fed are weighing how long they should continue at this pace and when the right time is to start taking their feet off the brake, so to speak. According to Powell, they’re attempting to balance potential risks of cutting interest rates too early, which could risk seeing inflation take off again.

At the same time, if they wait too long to cut rates, it could weigh on the economy and potentially even trigger a full-blown recession.

As he said in his comments this week:

“We believe that our policy rate is likely at its peak from this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But, the economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured.”

In January, the Federal Open Market Committee voted to keep interest rates the same, at a range between 5.25% and 5.5%. That still marks the highest level they’ve been at in the last 22 years.

While policymakers have said multiple times that it’s possible rates could be cut this year, Powell has also repeatedly warned that it’s not imminent that cuts would be made.

The next meeting of the committee is scheduled for March 19-20, and it’s widely expected that rates will once again remain at the same level they’re at now.

Many investors who are expecting cuts don’t expect them to happen until at least June. They also expect that there could be as many as three or four total reductions in 2024.

While that’s certainly good news, it’s a steep reduction from earlier in the year, when investors believed there could be six rate cuts this year, and that they’d begin in March.