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Federal Reserve Chairman Jerome Powell told House Democrats on Wednesday that interest rate cuts were likely “sometime” in 2024 and that he was open to big changes to a controversial proposal that would require banks to hold more capital.

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

However, two topics dominated: monetary policy and banking regulation.

Powell made it clear that he still expects cuts “at some point this year,” even after some hot numbers on inflation, but also warned that the Fed will take its time.

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

Powell also made clear Wednesday that he expects “sweeping and significant” changes to a proposed Fed rule that would require the largest U.S. lenders to maintain larger buffers against future losses.

The rule, the most aggressive change to banking regulation since the 2008 financial crisis, was criticized by Republicans, some Democrats and many banks.

“It is more important that we do it right than that we do it quickly,” he said of that proposal, known as the Basel III endgame.

He did not rule out heeding calls to withdraw the idea and start over with a new proposal.

“If this turns out to be the right thing to do, we won’t hesitate to do it,” Powell said.

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

Federal Reserve Chairman Jerome Powell prepares to testify during a Senate hearing in June 2023. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

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

“Regulators should pull it back and start over,” McHenry said of these capital rules.

Elsewhere, Powell acknowledged the large amount of feedback his agency had received on the proposal, saying it was “unlike anything I've ever seen.”

The story goes on

Democratic Rep. Maxine Waters of California focused her remarks on housing, saying it is 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 monitoring the issue, but that housing was one of several measures he was focused on, saying the “overall story” was a decline in inflation overall.

At other times, he weighed in on topics such as the role of immigration on the economy, last year's bank failures, the potential impact of AI on financial services and the challenges banks face from exposure to commercial real estate.

He said commercial real estate is a “manageable” issue for mid-sized banks, although he expects some losses.

It's an issue the central bank will work on for “several years,” he added.

He also spoke more generally about the economy, often emphasizing that economic developments could go in different directions in the coming months and change the central bank's next steps.

“The pandemic is still writing the history of our economy and we should just be prepared to be surprised with the next chapter, like we were with 2023,” he said.

'Bumpy'

Powell's testimony to House Democrats comes two weeks before the central bank's next policy meeting, where officials are widely expected to leave interest rates unchanged for the fifth straight day.

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

Powell first suggested in December that the Fed would likely move to cut rates in 2024, and his colleagues predicted a consensus of three rate cuts this year. This led many investors to predict that the first cut would occur in March.

But in the first two months of 2024, Powell and some of his Fed colleagues have warned the public about how soon monetary policy easing might begin, pushing back expectations for cuts to later in the year.

Some better-than-expected inflation numbers and strong employment numbers only reinforced this cautious approach.

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

Then last week, the Fed's preferred inflation indicator – the core personal consumption expenditures (PCE) index – rose 0.4% from the previous month, marking the largest increase since January 2023.

The monthly increase marked a significant shift in inflation data. On a six-month annualized basis, core PCE now stands at 2.5%, above the 1.9% level reached in the previous two reporting periods.

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

Powell highlighted the Fed's dilemma in his remarks on Wednesday. In his opinion, cutting interest rates too early could lead to the undoing of excessive progress made so far in reducing inflation. But the Fed also doesn't want to keep interest rates high so long that it weakens 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 estimating a total of six at the start of the year.

However, that timeline could slip even further if progress on inflation stalls or the labor market and wages continue to outperform expectations. A prominent economist has already predicted that the Fed will not raise interest rates at all this year.

“The economic outlook is uncertain and further progress toward our 2% inflation target is not assured,” Powell said in his remarks on Wednesday.

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