Federal Reserve Chairman Jerome Powell testified before Congress on Wednesday, delivering his Semiannual Monetary Policy Report before the House Financial Services Committee. We’re now about two weeks from the Federal Open Market Committee (FOMC)’s next scheduled meeting, and investors are perhaps hoping for a sneak peek at what the Fed might do about rates of interest.
During his testimony today, Powell did offer some insights into where the central bank stands heading into the March FOMC meeting, and the market responded favorably. The main indexes were all trending higher on Wednesday because the S&P 500 rose about 44 points (0.9%), the Dow Jones Industrial Average gained 217 points (0.6%), and the Nasdaq Composite rose 166 points (1%) in midday trading.
Fed on course to dial back rates
Powell made quite a number of remarks that might be construed by investors as reiterating that the Fed stays heading in the right direction to lower rates of interest this yr. The massive query is when.
In his prepared remarks before the committee, Powell said that with inflation nearing their 2% goal without significantly impacting unemployment or economic growth, “our policy rate is probably going at its peak for this tightening cycle. If the economy evolves broadly as expected, it’s going to likely be appropriate to start dialing back policy restraint in some unspecified time in the future this yr.”
Nonetheless, he added that reducing rates “too soon or an excessive amount of could lead to a reversal of progress we’ve seen in inflation and ultimately require even tighter policy to get inflation back to 2%. At the identical time, reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
That doesn’t necessarily mean rates will start easing in March. As Powell said, the committee “doesn’t expect that it’s going to be appropriate to scale back the goal range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Personal consumption expenditures (PCE), a key measure of inflation that the Fed relies on, was all the way down to 2.4% in January from 2.6% in December. It could take one other month or two of the PCE going all the way down to trigger a rate cut.
The February PCE report is as a consequence of come out on March 29, so don’t expect any motion until the Apr. 30 – May 1 meeting at absolutely the earliest. Nonetheless, it’s more likely that we could see some motion on the June 11-12 meeting — if the present trends proceed.
Later, within the question-and-answer segment with members of the House Financial Services Committee, Powell indicated growing confidence that the economy is on course.
“We expect due to the strength within the economy and the strength within the labor market and the progress we’ve made, we are able to approach that step fastidiously and thoughtfully and with greater confidence,” Powell said. “After we reach that confidence, the expectation is we are going to accomplish that sometime this yr. We are able to then begin dialing back that restriction on our policy.”
No sign of recession
The opposite positive that the collective market looked as if it would take from Powell’s remarks was his outlook on the economy. For months, investors have been hearing about an economic slowdown in 2024, a sputtering stock market, and maybe even a recession.
Nonetheless, the stock market is up by about 7%, and the economy has grown faster than expected, with the gross domestic product (GDP) up 3.3% within the fourth quarter and three.1% for all of 2023. When asked concerning the economy, Powell said he expects it to proceed expanding at a sturdy pace in 2024.
“I’ll say there’s no evidence or no reason to think that the U.S. economy is in, or in some type of, short-term risk of falling right into a recession,” Powell said throughout the Q&A session. “Having said that though, there’s at all times a meaningful possibility that an economy will fall into recession. I don’t think that possibility is elevated at the present time.”
Technology stocks, that are typically probably the most proof against high rates, were up probably the most on Wednesday, because the Nasdaq jumped greater than 1% on the day.
Powell is scheduled to talk again before the committee on Thursday, after which the FOMC is ready to satisfy on March 19 and 20. Investors will little doubt be tuned in for more clues.