Key takeaways from Fed Chair Powell’s testimony on Capitol Hill

By Bryan Mena, CNN

Washington, DC (CNN) — The Federal Reserve is in no rush to cut interest rates, Fed Chair Jerome Powell testified before congressional lawmakers Wednesday. That means more pain for Americans, who have already faced almost two years of rising borrowing costs on everything from car loans to mortgages.

However, it’s unlikely that there will be any rate hikes this year, Powell said.

“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell noted. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”

That means rate cuts do remain on the table — if the economy cooperates.

Powell cheered inflation’s remarkable slowdown over the past year, but said the Fed “does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.”

While Republicans fired off several questions about a new banking regulation proposal, Democrats focused their ire toward housing affordability being in the doldrums. Mortgage rates, which are influenced by the Fed’s actions, have been contributing to low affordability. However, low supply has been a much bigger driver over the long run.

Powell’s comments come amid concerns from some on Wall Street that inflation’s descent might be stalling. Recent economic data showed that price pressures persisted in January, so the timing and pace of rate cuts remains up in the air. What’s clear is that Fed policymakers broadly agree that they want to see more steady progress in the coming months.

Here are key takeaways from Powell’s testimony before the House Financial Services Committee.

No recession on the horizon

Powell gave lawmakers a positive assessment of the US economy’s health and its future.

In response to a question from Rep. Al Green of Texas, Powell said growth is expected to continue at a solid clip this year. That’s the broad expectation among economists and Fed officials, with the median projection for growth this year at a healthy 1.4% annualized rate, according to their December projections.

“I will say there’s no evidence or no reason to think that the US economy is in, or in some kind of, short-term risk of falling into a recession,” he said. “Having said that, though, there’s always a meaningful possibility that an economy will fall into recession. I don’t think that possibility is elevated at the current time.”

Economic growth in the fourth quarter registered at a robust 3.2% annualized rate, with consumer spending running at a solid clip, a few steps down from the blistering 4.9% in the third quarter, but still robust by historical standards. Growth likely remained solid in the beginning of the year, too. The Atlanta Fed is currently projecting first-quarter gross domestic product to come it at a healthy 2.1% annualized rate.

Some think that a red-hot economy could make the Fed’s job of defeating inflation difficult, but if the Atlanta Fed’s projection bears out, it would show that there’s been a clear slowdown since the summer when Americans splurged on concerts, films and goods. Powell told lawmakers Wednesday that the Fed wants to see more of the same: A slower economy and slower inflation.

The risk from empty office buildings

Powell was also pressed on the macroeconomic risk that empty office buildings pose as property values decline and employees continue to work remotely. That’s particularly an issue for banks that provided loans to landlords who have slashed rents or sold properties at a steep loss with vacancy rates in major areas still elevated.

“I think it’s manageable. We’ve been working hard to manage it for some time now,” Powell said in response to a question from Rep. Jim Himes of Connecticut.

Powell said the Fed is specifically keeping an eye on banks with “significant” commercial real estate concentrations, which is a point he’s made several times in prior comments.

“We’ve been in touch with them to make sure that they have a plan to deal with that,” he said, adding that “there will be losses by some banks.”

As Powell was testifying, New York Community Bank’s stock plummeted more than 40% Wednesday afternoon after The Wall Street Journal reported that the beleaguered regional lender is seeking a major cash infusion. NYCB is a regional lender that is highly exposed to commercial real estate losses, but its woes haven’t had a knock-on effect on other banks with a similar portfolio.

Valley National Bank (VLY), which has the highest exposure to commercial real estate among the 100 largest banks in the US, was down less than 3% on Wednesday. The KBW Regional Bank Index was also down less than 3%.

Lawmakers blast proposed banking regulations again

The Fed chief got an earful from Republicans on a package of new banking regulations known as Basel Endgame III that is expected to be rolled out in the coming years. The new regulations would require major and medium-sized banks to hold more capital, which detractors argue will mean fewer funds to lend out to businesses and consumers, and possibly higher interest rates on loans.

The proposed Basel regulations were first developed by an international committee of banking authorities in response to the Great Recession years ago. Last year, the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation announced a proposal on banks’ capital requirements meant to put in place the Basel framework.

Ahead of the hearing, all 29 Republicans in the committee penned a letter to Powell and other heads of financial regulation agencies urging them not to move forward with Basel III.

Powell said the Fed is still looking over “hundreds” of comments submitted on the proposal and that the final version will likely look very different and hopefully appeal to a broad consensus of stakeholders.

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