Federal Reserve Chair Jerome Powell testified before the Senate Committee on Banking, Housing and Urban Affairs, mostly dodging questions about rate cuts while being pressed by lawmakers on housing affordability, inventory and a wobbly commercial real estate market.
Powell struck a measured tone; he did not offer a timeframe on when the Fed might lower interest rates beyond saying that economic data would need to show inflation reaching 2%. He also repeatedly declined to oblige senators who asked for a firmer commitment on when interest rates will come down.
Despite his stony face, Powell’s prepared remarks were optimistic. After noting that the first quarter of 2024 failed to produce the Fed’s desired movement on inflation, he said Q2 2024 was a marked improvement.
“The risks of achieving our employment and inflation goals are coming into better balance,” said Powell, who repeatedly described the cooling labor market as a positive economic sign throughout the hearing. “In the labor market, a broad set of indicators suggest the conditions have returned to about where they stood on the eve of the pandemic. Strong but not overheated. The unemployment rate has moved higher, but was still low: 4.1% in June. Strong job creation in the last few years has been accompanied by an increase in the supply of workers.”
“Inflation has eased notably over the past couple of years,” Powell noted, “but remains above the Federal Open Market Committee’s longer-running goal of 2%.” Inflation will need to come closer to that goal before the Fed considers cutting interest rates.
“The committee has maintained the target range for the Federal Funds rate at 5.25% to 5.5% since last July. After having tightened the stance of monetary policy significantly over the past year and a half…our restrictive monetary policy stance is helping to bring demand and supply conditions into better balance and put downward pressure on inflation.”
Questioned by Senator Jack Reed (D-RI) about concerns, “We’re not on a faster track to decreasing interest rates,” Powell answered that the Fed is currently “balancing the risks” of its dual mandate (maximum employment and reining in inflation). Lowering interest rates too late, Powell said, hurts economic activity, while lowering too early will undo inflation progress. The clearest answer he offered is that current data makes a rate increase unlikely for the foreseeable future.
Senator John N. Kennedy (R-LA) bluntly asked Powell when he and the Fed Board intend to lower interest rates. Powell responded that he “won’t be sending any signals.”
What the Federal Reserve is thinking on housing
The high costs of housing as a side effect of the Fed’s tight monetary policy were a repeated topic during the hearing. Senator Mark Warner (D-VA), though he did not devote his line of questioning to the issue, noted “I probably hear more on housing and housing affordability than any other issue (from my constituents).”
Committee Chair Senator Sherrod Brown (D-OH) spent a long section of his opening remarks highlighting the struggles of prospective homebuyers.
“Homeownership has long been a bedrock of our middle class, but today, fewer and fewer middle-class families can afford to buy a home. Higher interest rates are making our country’s housing supply worse, not better. We need more housing construction, of all types, and higher rates lead to the opposite and particularly make it harder for multifamily construction to work financially.”
In his subsequent questioning of Powell, Brown posed three yes-or-no questions to the Fed Chair, designed to illustrate how high interest rates are hurting the housing market:
- “Since late 2022, when the Fed began raising rates, has the volume of housing sales decreased?”
- “Since late 2022, has the median home price increased?”
- “Since late 2022, have monthly mortgage payments become more or less affordable for homebuyers?”
Powell answered in the affirmative to all three questions.
Senator Jon Tester (D-MT) questioned Powell on how the Federal Reserve is minding housing as it sets its monetary policy. Powell indicated that a simple return to a pre-pandemic norm in the housing market is his goal.
“We have significant housing issues in the country, and we had them before the pandemic,” Powell said. “The pandemic has created new distortions. Monetary policy works through interest sensitive spending. There is no more interest sensitive spending than buying a house and having a mortgage, so our tighter policy is having an impact on economic activity in the housing sector. I would say, the best thing we can do for housing is to succeed in getting inflation down to 2% so rates can come down so housing can get back to pre-pandemic normal, which is still a housing shortage but not dealing with the kinds of specific things we’re dealing with now.”
When Tester pressed the question, saying he was “speaking from (concern about) economic growth,” Powell said the Federal Reserve is not best suited to address housing supply.
“For housing supply, the best thing we can do is get inflation under control…I think policies to increase housing supply are really not so much in the hands of the Fed. They’re in the hands of legislatures, state and federal.”
Senator Tina Smith (D-MN) asked Powell about commercial real estate, specifically concerns that U.S. banks are over-invested in that currently declining sector. Powell answered that the risk of commercial real estate “will be with us for years. To prevent economic recession, banks need to be assessing what their risk is. They need to assure that they have the capital and liquidity.” Powell said that the Fed’s stress tests have shown large banks, and most small ones, can manage the problem—it is local ones invested in local commercial real estate that could have a problem should the commercial sector take further hits.
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