On Tuesday, Federal Reserve Chairman Jerome Powell expressed concerns that maintaining high interest rates in the long term could jeopardize economic growth. He also mentioned that more positive data would strengthen the case for cutting interest rates.
Powell attended a hearing with members of the Senate Banking Committee on Tuesday, and another hearing with the House Financial Services Committee on Wednesday. He noted that while the economy and labor market remain strong, there has been a slight cooling off recently.
“At the same time, given the progress made in reducing inflation and cooling the labor market over the past two years, rising inflation is not the only risk we face,” he said in his prepared remarks. Powell emphasized the potential negative impact of overly late or insufficient policy adjustments on economic activity and employment.
“This year, we have seen limited progress towards achieving the 2% inflation target, but recent monthly data show further modest advances. More ‘good’ data will enhance our confidence that inflation is steadily moving towards 2%,” Powell stated.
Based on the Fed’s favored Personal Consumption Expenditures Price Index, the inflation rate was at 2.6% in May, while it peaked above 7% in June 2022.
The June consumer price information will be released by the Fed on Thursday.
Powell’s comments come as the Fed approaches the one-year anniversary of its last rate hike. The overnight borrowing rate range currently stands at 5.25% to 5.5%, the highest in 23 years, following 11 consecutive rate hikes after reaching the highest inflation level since the early 1980s.
The employment report from last Friday showed an addition of 206,000 new jobs in June, but the monthly growth trend slowed down, with the unemployment rate rising to 4.1%.
Powell described this figure as “still low” and emphasized that “rising inflation is not the only risk we face.”
He warned that an overly tight monetary policy maintained for too long “might excessively weaken economic activity and employment,” disrupting the economic growth cycle. Powell added that current economic growth remains “robust,” private demand is “strong,” overall supply conditions are improving, and housing investments are “recovering.”
Powell’s remarks may further reinforce expectations for a rate adjustment during the Fed’s late July meeting. This could pave the way for a rate cut in September, with investors currently estimating a 70% chance of a cut – unless future inflation data unexpectedly rises.
At the Fed’s meeting on June 11-12, the average prediction by 19 officials was a 25-basis-point rate cut by the end of the year, but since then, inflation data has consistently fallen short of expectations.
During his recent appearances, Powell refrained from making significant policy statements, emphasizing the Fed’s apolitical nature and its commitment to operating with “independence.” In his prepared remarks, he underscored the importance of the Fed’s operational independence in fulfilling its duties.
His other remarks directly focused on the relationship between policies and the overall economy. Recent data shows an increase in the unemployment rate and a slowdown in the overall growth measured by Gross Domestic Product (GDP). In June, both manufacturing and services sectors experienced contractions.
However, Powell noted that despite the slowdown in GDP growth, the “U.S. economy continues to expand steadily.”
“Nevertheless, private domestic demand remains strong, consumer spending growth is slowing down but still stable,” he said.
During congressional hearings, Powell typically faces a wide range of questions on various topics, with the decision on whether the Fed will cut rates or delay the decision potentially becoming part of the debate.
In a congressional report released last week, the Fed pointed out valid reasons to believe that price pressures, especially in the real estate market, are decreasing, with real estate being a significant factor in ongoing inflation.
Coupled with concerns about the job market, economists from Pantheon Macroeconomics stated after the latest employment report that this should “make the Fed more worried about the risk of an economic downturn rather than sticky inflation.”
(*This article references reports from Reuters and CNBC)