Fed eyeing rate cut, but needs to see more positive data, Powell says

Federal Reserve officials are turning their attention to lowering interest rates sometime this year, but the timing for the first rate cut remains unclear as the central bank tries to avoid moving too fast or too slow, Fed Chair Jerome H. Powell told lawmakers March 7.

"We believe that our policy rate is likely at its peak for this tightening cycle," Powell said in testimony before the Senate Banking Committee. "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."

Powell said that reducing policy restraint too soon or too much could result in a reversal of progress made in the Fed's fight against high inflation and ultimately require even tighter policy to get inflation back to its 2% objective. However, "At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment," Powell noted.

Since March 2022, the Federal Open Market Committee has raised the funds rate, which is now at its highest level since 2001, 525 basis points. But since July, the Fed has held the federal funds rate steady at a range of 5.25% to 5.5%.

Powell on March 7 reiterated a point the committee made following its most recent meeting on Jan. 31: The Fed will not lower rates until it has greater confidence that inflation is moving sustainably toward the Fed's 2% inflation target.

The Bureau of Labor Statistics reported on Feb. 13 that the consumer price index rose an annualized 3.1% from a year ago in January, above expectations, but below the 3.4% figure recorded in December.

Shortly after Powell's testimony, market participants indicated there was a 97% probability that the Fed will hold rates steady once more at its next meeting on March 20, and a 21% chance that it will initiate a quarter-point rate cut at its following meeting in May, according to the CME FedWatch Tool that tracks trading in the 30-day fed funds futures.

Sen. Sherrod Brown, D-Ohio, chair of the banking committee, implored Powell to cuts rates soon to help American workers. "Keeping rates too high for too long strangles the economy," Brown said.