Jerome Powell Hints At 2024 Interest Rate Cuts, Awaits ‘Greater Confidence’ On Inflation: Stocks Rebound, Dollar Falls

Federal Reserve Chair Jerome Powell suggested Wednesday the possibility of loosening monetary policy “at some point this year” while highlighting the uncertain economic outlook and the imperative to move cautiously.

Economic And Monetary Policy Outlook

In the opening remarks for his semiannual testimony before the U.S. Congress, Powell highlighted the robust economic activity seen with 3.1% GDP growth in 2023, fueled by solid consumer demand and improved supply conditions. Despite a relatively tight labor market, Powell said a balance is being struck between labor supply and demand, with job gains averaging 239,000 jobs per month and an unemployment rate stabilizing at 3.7%.

“Labor market tightness has eased, and progress on inflation has continued,” he said.

Despite inflation rates easing from their previous highs, they remain above the Fed’s 2% goal, the Fed chair said. The headline personal consumption expenditures index rose 2.4% over the 12 months ending in January and core PCE prices increased by 2.8%.

Powell reiterated the Federal Open Market Committee’s commitment to returning inflation to its target level.

After significant tightening of monetary policy since early 2022, Powell said the policy rate is “likely at its peak for this cycle,” setting the stage for a possible reduction contingent upon continued progress toward the 2% inflation target and a careful assessment of incoming data and risks.

Powell Flags Risks Of Premature Easing

Powell addressed the balancing act the FOMC faces: the risk of easing policy too soon could reverse the progress on inflation, potentially necessitating even tighter policy to return to the 2% target.

Conversely, delaying adjustments could weaken economic activity and employment.

“We do not expect it will be appropriate to reduce the policy rate until we have greater confidence in inflation moving sustainably toward 2%,” he said.

The Fed remains committed to its 2% inflation target, he said, aiming to restore price stability as a cornerstone for sustained employment and economic growth.

Market Reactions

The U.S. Dollar Index (DXY), as tracked by the Invesco DB USD Index Bullish Fund ETF (NYSE:UUP), declined significantly following Powell’s remarks as traders bolstered bets on Fed rate cuts later this year.

Futures on U.S. equity indices indicated a positive start to day on Wall Street. Contracts on the S&P 500 rose 0.5%, while those on the tech-heavy Nasdaq 100 rallied 0.9%.

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