On Tuesday, July 9, Federal Reserve Chairman Jerome Powell stated in his speech before the US Senate that the US is “no longer an overheating economy,” with the job market cooling down from the extreme conditions during the pandemic and in many aspects returning to pre-crisis levels.
According to Reuters, Powell told the Senate Banking Committee that the Fed faces a dual risk and can no longer focus solely on inflation. He emphasized that the labor market appears to have fully balanced and highlighted the dual risks of Fed policy: acting too early or too late, facing risks to both full employment and price stability responsibilities.
Powell also informed lawmakers that he did not want to “signal anything about the timing of future rate actions.”
This stance aligns with Powell’s recent attitude of focusing more on the evolution of economic data and potential responses the Fed might take, rather than provide clear guidance on the timeline of events.
Ahead of the November election, the Fed has only two scheduled meetings left. Democratic senators queried Powell about the risks of not cutting rates sooner for the job market, while Republican senators asked about inflation rates still above the central bank’s 2% target and the potential burden on households.
Throughout the hearing, Powell emphasized the importance of Fed independence in rate-setting decisions and his commitment to data-driven decision-making.
Analysts suggest his views may be laying the groundwork for a rate cut as early as September.
“He has already shifted slightly toward balancing risks within the Fed’s responsibilities,” said Christopher Hodge, Chief US Economist at a French bank in New York. “The Fed needs to get ahead of weaknesses in the labor market… seems to be setting the stage for a change in September.”
Following Powell’s speech, investors continued to see a 70% chance of a Fed rate cut in September. The Fed is set to release its policy statement after the July 30-31 meeting, possibly with further adjustments to rate cut predictions.
Brian Jacobsen, Chief Economist at Annex Wealth Management in Wisconsin, stated, “He (Powell) is starting to prepare for a rate cut. They believe not cutting rates fast enough poses risks.”
After Powell’s semi-annual testimony before the Senate, a hearing is scheduled in the House of Representatives on Wednesday at 10 am EST.
Although Powell’s initial remarks focused on economic and monetary policy assessments, senators’ questions centered around housing costs, particularly the proposed banking regulatory changes being internally discussed at the Fed.
When asked by Senator Raphael Warnock about housing issues, Powell reiterated that the best thing they can do for the real estate market and the economy is to continue lowering inflation rates so that people no longer talk about it.
Regarding plans to increase capital requirements for large banks, Powell mentioned that the Fed and other regulatory agencies are in the process of modifying the proposal issued in July 2023, and public feedback on the revised plan may be sought before finalizing it. Powell suggested that having the final rules in place by early 2025 “may be appropriate.”
In his prepared remarks, Powell pointed out that inflation has been improving over the past few months, and “more good data would be a reason to strengthen” loose monetary policies.
Since July 2023, the Fed has maintained policy rates within the range of 5.25% to 5.5%.
Consumer price information for June is set to be released on Thursday. Analysts expect another round of soft data, as the May Consumer Price Index showed no increase.
The employment report published last Friday showed a 206,000 increase in new jobs in June, yet the monthly growth trend has slowed down, with the unemployment rate rising to 4.1%. Treasury Secretary Janet Yellen stated this should help further ease inflation.
Powell referred to the unemployment rate as “still very low,” but noted that given progress made in curbing inflation and cooling the labor market over the past two years, rising inflation is not the only risk they face.
He stated that persisting with overly tight monetary policy in the long term “might overly weaken economic activity and employment,” disrupting the growth phase. However, he mentioned that economic growth remains “robust,” private demand is “strong,” overall supply conditions are improving, and residential investment is “picking up.”
He further mentioned that the US economy is performing the best globally.
Powell tried not to signal any short-term policy decisions, resulting in a muted market reaction. Wall Street views the Fed chief’s economic remarks as balanced, with the stock market hovering near historic highs. However, US Treasury bonds are struggling to gain traction as some traders are preparing for stronger signals of policy easing.