Powell Again Advocates Caution... "Rates Will Fall This Year, But Confidence in Inflation Slowdown Is Needed" (Update)

Repeated Warnings Against Early Interest Rate Cuts
"A Good Path for a Soft Landing... No Risk of Recession"

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), stated that a rate cut within the year would be appropriate, but it must be predicated on greater confidence that inflation is slowing. He reaffirmed a cautious stance, indicating that the Fed will not rush into lowering interest rates. He also said that he does not see an immediate risk of the U.S. economy falling into a recession.

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On the 6th (local time), Powell appeared before the House Financial Services Committee for the semiannual monetary policy report and said, "A rate cut is not guaranteed until we gain greater confidence that inflation is moving steadily toward the central bank’s 2% target."

He explained, "If policy restrictions are eased too early or too much, progress on inflation could be reversed," adding, "Ultimately, more restrictive policies may be needed to bring inflation back to 2%." At the same time, he warned of the risks of prolonged excessive tightening, saying, "Reducing policy restrictions too late or too little could excessively weaken economic activity and employment."

This can be seen as a reaffirmation of the caution against early rate cuts that Powell and other Fed officials have emphasized several times.

As the reason for maintaining caution in shifting monetary policy, Powell pointed to the resilience of the U.S. economy. He said, "We are on a good path to reach that (soft landing)," and added, "I do not think there is an immediate risk of the U.S. economy falling into a recession."

He also expressed an expectation for a rate cut within this year. Powell said, "We view the policy rate as having peaked in this tightening cycle," and added, "If the economy broadly and gradually evolves as expected, it would be appropriate to reverse policy restraint at some point this year." Earlier, the Fed indicated through its dot plot at the Federal Open Market Committee (FOMC) meeting in December last year that it could cut the benchmark interest rate, currently at 5.25?5.5%, by a total of 0.75 percentage points in three steps by the end of 2024.

Regarding recent inflation trends, Powell diagnosed that the slowdown is notable and widely spreading. Although inflation unexpectedly rose in January, the Wall Street Journal (WSJ) analyzed that this suggests the Fed’s baseline forecast of a slowdown within the year remains unchanged. Earlier, the January Consumer Price Index (CPI) and Producer Price Index (PPI) rose 3.1% and 0.9%, respectively, compared to a year earlier, exceeding expectations (2.9% and 0.6%).

Powell added that if the labor market weakens or inflation falls to a very convincing level, there is a possibility of cutting rates earlier and at a faster pace.

He also said that the banking crisis caused by the commercial real estate downturn is "manageable."

On the same day in Congress, both the Democratic and Republican parties urged Powell to cut rates early and to scrap plans to increase capital requirements for large banks, respectively. The Fed introduced capital adequacy regulations last July requiring large banks to hold 20% more capital, but banks have strongly opposed this.

Powell responded by saying, "I expect broad and significant changes," indicating the possibility of scrapping the large banks’ capital increase plan and adopting a new proposal.

Meanwhile, the three major indices of the New York Stock Exchange all closed higher that day. The market focused on Powell’s remarks that a rate cut within the year would be appropriate. There was a sense of relief as no additional negative factors were confirmed. Jose Torres, Senior Economist at Interactive Brokers, analyzed, "Powell did not promise a rate cut in the near future, but his confidence that the central bank’s current rate has peaked and his positive view on the inflation trajectory are enough for market participants."

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