Powell Hints at Possible Rate Cut Amid Risks of Higher-for-Longer

In testimony before the U.S. Senate Banking Committee Tuesday, Fed Chair Powell told the committee that a federal funds rate cut might be coming soon.

State of the market: Since the July meeting of the Federal Open Market Committee, the Fed has kept the key interest rate between 5.25% and 5.5%. Powell reiterated the Fed's target of 2% inflation, noting that early 2024 data did not inspire confidence that this goal was within reach. However, he highlighted recent improvements in inflation data, suggesting some progress toward the target. Powell also described the jobs market as "strong, but not overheated."

What about CRE? During his testimony before the Senate Banking Committee, Powell highlighted the enduring nature of commercial real estate risks, advising banks to honestly assess their exposure and ensure they have adequate capital, liquidity, and risk management systems in place. “It is a risk that has been with us and will be with us for some time, probably for years,” he stated.

Stress test: The Fed's most recent stress tests show large banks can manage CRE risks, while most small banks are similarly equipped. However, the top 25 largest banks are experiencing more loan delinquencies. Loans for non-owner-occupied properties held by banks with over $100 billion in assets have over 4.4% delinquency rates in Q1, compared to less than 1% for smaller banks and owner-occupied loans, per S&P Global Market Intelligence.

Risks of higher for longer: Powell acknowledged the risks of prolonged high rates, stating that maintaining elevated inflation is not the only concern. He warned that reducing policy restraint too late or too little could significantly weaken economic activity and employment. He also said that a weakening labor market is just as much a risk to the economy as high inflation.

➥ THE TAKEAWAY

Looking ahead: Following Powell's comments, investors maintained a nearly 70% probability of a Fed rate cut in September, according to Reuters. Brian Jacobsen, chief economist at Annex Wealth Management, said that Powell seems to be preparing for a rate cut, as the Fed views delaying such action as risky.