Washington
CNN
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Inflation has come a long way since hitting a four-decade high two years ago, Federal Reserve Chairman Jerome Powell said on Tuesday. However, central bank officials still want to see more progress before cutting interest rates, he noted, although they are also watching the labor market.
“We do not expect that it would be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving steadily toward 2%,” Powell said in prepared testimony filed before congressional legislators. During the hearing, Powell did not specify that a cut this year remains possible, or give any hint about the timing of the first rate cut, which is a departure from previous comments he has made.
“However, the latest inflation readings have shown modest further progress and more good data would strengthen our belief that inflation is moving steadily towards 2%,” he added.
Powell appeared before the Senate Banking Committee on Tuesday to deliver his semiannual monetary policy report to Congress. He heads to the House Financial Services Committee on Wednesday to address the same report on the state of the US economy.
The Fed’s benchmark interest rate, which affects borrowing costs across the economy, has been at a 23-year high for about a year now, as the central bank aggressively raised rates to curb inflation. While the pace of price increases slowed dramatically in 2023, it hit a snag earlier this year, which pushed back the timing of the first projected rate cut. Fed officials expect to cut interest rates just once this year, according to their latest economic forecast in June, compared with the three cuts they predicted in March.
Inflation resumed a downward trend in the spring, but officials appear to be on pace to say they need more evidence that inflation is indeed moving toward their 2% target. In June, consumer prices did not rise on a monthly basis for the first time since November, according to the Fed’s preferred gauge of inflation, the Personal Consumption Expenditure price index. The annual PCE inflation rate was recorded at 2.6% in June, down slightly from 2.7% in May.
“Inflation is now around 2.5 percent, so we’ve seen significant progress in bringing it down,” New York Fed President John Williams said last week at an event in India. “But we still have a way to go to reach our 2% target on a sustained basis.”
But inflation isn’t the only thing the Fed is watching as it considers when to start cutting interest rates. The Fed is keeping a close eye on America’s strong labor market as it shows signs of cooling. It comes as US consumers show signs of pulling back after years of elevated inflation and a sharp rise in interest rates, according to the latest spending data and remarks from retailers.
Here are the highlights from Powell’s hearing before the Senate Banking Committee.
The Fed’s top leader told senators that America’s labor market now looks similar to how it did before the Covid-19 pandemic: “strong but not overheated”. The US labor market rebounded strongly after a brief, pandemic-induced recession in 2020 and has continued to expand since then. But it has softened a bit recently: The jobless rate last month climbed to the highest level in more than two years, and new applications for unemployment benefits have surged in recent weeks.
“I’m concerned that if the Fed waits too long to cut interest rates, the Fed could undo the progress we’ve made in creating good-paying jobs,” he said during the hearing.
The U.S. labor market is still a pillar of strength for the broader economy, but it’s not moving at the same red-hot pace it did a few years ago. The unemployment rate rose higher, to 4.1%, in June, the highest rate since November 2021, although employers have continued to hire at a brisk pace. The gap between job openings and the number of unemployed looking for work, a measure of how tight the labor market is, has narrowed significantly over the past year.
Powell said throughout the session that the Fed is fully aware that it is dealing with “double-sided risks” — one of reviving inflation because the central bank cut rates too quickly, and the other of a significant weakening of the labor market because the Fed waited too long to lower rates. Both risks would result in consequences for Americans and the overall US economy.
The Fed is charged by Congress with stabilizing prices and maximizing employment, and it balances its focus on each goal depending on the economic circumstances at the time. For several years, the Fed has focused more on the inflation side of its dual mandate, but that has changed recently.
“If we see that the labor market was unexpectedly weakening, which means more than we’ve seen materially unexpectedly,” Powell said, “then we can also respond to that because we have a dual mandate and we .now we see the two mandates more balanced than they were a year ago.”
America’s economic engine, consumer spending, is starting to show some cracks. Sales at US retailers have been consistently weaker than expected in recent months, and retailers have sounded the alarm about shoppers across the income spectrum trading down for cheaper alternatives. Recent surveys of businesses that provide services in the United States have shown that consumer demand so far this summer has been tepid, a stark contrast to last year when Americans grew.
Taken together, recent economic data helps make a case for the Fed to start lowering borrowing costs.
The Fed chief told lawmakers that a proposed set of banking rules is likely to be revised and re-proposed — a topic Republicans have repeatedly raised with Powell. Meanwhile, some Democrats talked about rules on the compensation of Wall Street executives.
The Fed is one of the nation’s primary banking regulators, in addition to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. After the Great Recession, banking authorities around the world gathered in Basel, Switzerland, to develop global standards for banks to strengthen financial stability. These rules are still in the process of approval and implementation.
The final phase of these banking rules is known as the Basel III Endgame and requires increasing the amount of capital that the largest banks hold to protect themselves from risks. The Fed’s latest so-called “stress test,” which is a simulation of how major banks would fare under tough economic conditions, showed that all 31 banks tested would survive and still be able to deliver credit. But they took a bigger financial hit than last year. When the end of Basel III was proposed last year, banking interest groups and lawmakers on both sides of the aisle pushed back, saying that requiring banks to raise capital beyond what is currently required would undermine their ability to loaned.
Powell said Tuesday that a “strongly held view of board members is that we should put a revised proposal out for comment for some time.” It is unclear what specific changes a new proposal would have.
Sen. Elizabeth Warren of Massachusetts grilled Powell over a long-delayed rule aimed at curbing reckless behavior on Wall Street related to incentive-based pay for executives, known as Section 956 of the Reform Act Dodd-Frank Wall Street and Consumer Protection passed in 2010. Several regulators, including the Fed, must figure out how to implement the rule first, but reaching a consensus among them is usually a challenge, especially considering the efforts intensive lobbying.
“The Fed has refused to join other financial regulators in finalizing a rule implementing Section 956 as directed by Congress,” Warren said. She noted a comment Powell made in the past that he wants to see evidence of the problem Section 956 would solve.
Powell said he “never said trust the banks to fix themselves.”