Federal Reserve Chair Jerome Powell told House lawmakers Wednesday that interest rate cuts are likely "at some point" in 2024, and that he is open to large changes to a controversial proposal requiring banks to hold more capital.

The central bank boss covered a number of topics during three hours of testimony before the House Financial Services Committee, touching on everything from immigration to commercial real estate to housing.

Two subjects dominated, however: monetary policy and bank regulation.

Powell made it clear he still expects cuts "at some point this year" even after some hot readings on inflation while also cautioning that the Fed would take its time.

"We want to see a little bit more data," he added during the question-and-answer session.

Powell also clarified Wednesday that he expects "broad and material" changes to a proposed Fed rule that would require the biggest US lenders to hold greater buffers against future losses.

The rule, the most aggressive change to how banks are regulated since the aftermath of the 2008 financial crisis, has been criticized by Republicans, some Democrats, and many banks.

"It's more important that we get this right than we do it fast," he said of that proposal, known as the Basel III endgame.

He didn't rule out heeding calls to pull back the idea and start over with a re-proposal.

"If that turns out to be the appropriate thing, we won't hesitate to do it," Powell said.

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Lawmakers from both parties, including House Financial Services Chair Patrick McHenry of North Carolina, focused on the bank capital rules during their time questioning the Fed chair.

"Regulators should withdraw it and start over," McHenry said of those capital rules.

At another point, Powell acknowledged the huge volume of feedback his agency has received on the proposal saying it was "unlike anything I've seen."

Democratic ranking member Maxine Waters of California focused on housing in her remarks, saying it was the No. 1 driver of inflation.

"Until we address the underlying housing shortage," she said, "inflation will remain too high."

Powell responded that he was indeed watching the issue but that housing was one of multiple measures he is focused on, saying the "overall story" was a lessening of inflation overall.

At other moments, he commented on topics like the role of immigration on the economy, last year’s bank failures, the potential impact of AI in financial services, and the challenges banks face from exposure to commercial real estate problems.

He said commercial real estate is a "manageable" issue for midsized banks, although he does expect some losses.

It's a problem the central bank will be working through "for several years," he added.

He also commented on the economy more widely, underlining often that economic developments in the months ahead could go in different directions and change the next steps from the central bank.

"The pandemic is still writing the story of our economy right now and we should just be prepared to be surprised with the next chapter, as we were with 2023," he said.

'Bumpy'

Powell's testimony before House lawmakers comes two weeks before the central bank’s next policy gathering, where officials are widely expected to hold rates steady for the fifth consecutive meeting.

The Fed last raised rates in July 2023 to a range of 5.25%-5.5%, a 22-year high, as part of the most aggressive campaign to cool inflation since the 1980s.

Powell first signaled in December that the Fed would likely pivot to rate cuts in 2024, and his colleagues predicted a consensus of three cuts this year. That prompted many investors to predict the first cut would happen in March.

But in the first two months of 2024, Powell and some of his Fed colleagues have been cautioning the public about how soon monetary easing could begin, pushing out expectations for cuts to later in the year.

Some higher-than-expected readings on inflation and strong jobs numbers only reinforced this cautious approach.

First, the Consumer Price Index (CPI) in January was hotter than economists expected, as was the Producer Price Index (PPI), which tracks the prices businesses pay to manufacture products and services.

Then last week, the Fed’s preferred inflation measure — the core Personal Consumption Expenditures (PCE) index — rose 0.4% compared with the prior month, marking the biggest jump since January 2023.

The monthly increase marked a stark shift in the inflation data. On a six-month annualized basis, core-PCE now sits at 2.5%, up from the 1.9% level it occupied in the previous two reporting periods.

Several Fed officials have warned recently that the path down to the Fed’s 2% target will be "bumpy," and they suggested cuts could now come in the summer or "later this year." That places the Fed on a collision course with the presidential election in November.

Powell highlighted the Fed's dilemma in his remarks Wednesday. Lowering rates too soon, he said, could halt undue progress made in getting inflation down so far. But the Fed also doesn’t want to hold rates high for so long as to weaken the economy, he added.

Investors appear to be listening to the Fed's cautious commentary. They now expect the first rate cut in June instead of March. They also expect three for the year, after starting the year estimating a total of six.

But that timeline could slip further if progress on inflation stalls or the job market and wages continue to beat expectations. One prominent economist has already predicted that the Fed won't raise rates at all this year.

"The economic outlook is uncertain, and ongoing progress toward our 2% inflation objective is not assured," Powell said in his remarks Wednesday.

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