US Fed signals rate cuts in 2024; Powell says progress towards 2% inflation target ‘not assured’

US Federal Reserve still expects to reduce its benchmark interest rate later this year, however continued progress on lowering inflation to the two per cent target “is not assured”, said Fed Chair Jerome Powell on Wednesday, March 6, in comments to US lawmakers who will face voters in a charged presidential election year.

"If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year," Powell said in remarks prepared for delivery at a hearing before the House Financial Services Committee. "But the economic outlook is uncertain, and ongoing progress toward our  two per cent inflation objective is not assured,'' added Powell.

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Powell's opening remarks held close to the language that Fed policymakers used to characterize the current state of the economy and the consequential decision of when to start reducing interest rates as US election campaigns take shape.

The Fed chair noted that inflation had "eased substantially" since hitting 40-year highs in 2022, and said there were risks of both cutting rates too soon and allowing inflation to reaccelerate. He added that there are risks of keeping monetary policy too tight for too long and damaging an ongoing economic expansion that has sustained a below four per cent unemployment rate for two years.

But he also remained reluctant to say when monetary policy might ease, repeating that officials still need "greater confidence" in a continued decline of inflation before they reduce a benchmark rate of interest that has been held in the 5.25 per cent to 5.5 per cent range, the highest in more than 20 years, since July.

This means interest rates for home mortgages, credit cards and small business loans will stay high, even as that tough monetary medicine helps relieve the high inflation that takes its own toll on firms and families, and has arguably contributed to US President Joe Biden's current low approval ratings. 

Some analysts are projecting price pressures to steadily ease, while others anticipating inflation will persist. Investors are expecting interest rate cuts by US Fed will likely start in June.

Powell's testimony comes at a time when inflation is now by some measures within striking distance of the Fed's two per cent target, but also as the economy remains unexpectedly strong, according to news agency Reuters.

Also Read: US Fed Policy: FOMC keeps key rates steady at 23-year high-mark in first verdict of 2024; no rate cuts seen in March

Even as the Fed has kept its policy rate "restrictive," overall financial conditions have been easing and asset prices rising on expectations of coming rate cuts. This could make inflation harder to tame and bolster arguments for a further delay.

The US Fed announced its interest rate decision today after a two-day Federal Open Market Committee (FOMC) meeting on January 31, leaving the benchmark interest rates unchanged at 5.25 per cent - 5.50 per cent for the fourth straight meeting, in line with Street estimates.

The US central bank ended its first policy-setting meeting of the year and unanimously voted to hold the policy rate at the 23-year high mark, but said it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward two per cent."

Since then, reports bolstering the soft-landing narrative, such as encouraging figures on services prices on Tuesday or signs of slowing consumer spending, have been counterbalanced by others showing inflation stuck in significant ways, such as from still-rising shelter costs, or evidence of unexpected economic strength, such as January's outsized gain of more than 350,000 jobs.

While the deep US cultural divide over issues like abortion and immigration may dominate the campaign, the Fed's decisions could determine whether the presidential vote occurs in an environment of low inflation, low unemployment and falling interest rates that typically favors an incumbent or in more challenging conditions.