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US Federal Reserve Chairman Jay Powell said the central bank had made “substantial progress” in its mission to beat inflation, but required “more good data” before cutting interest rates from where they are highest in 23 years.
Powell, in written testimony to the US Congress released on Tuesday, was optimistic that the US economy was returning to better balance as the Fed tries to return inflation to its 2 percent target.
The latest inflation reports — one of which showed the Fed’s preferred gauge fell to 2.6 percent in May — were encouraging and showed “modest further progress,” Powell said. But “more good data would strengthen our belief that inflation is moving steadily towards 2 percent.”
“Over the past two years, the economy has made substantial progress” toward the Fed’s inflation target, he said, adding that labor market conditions “have cooled while remaining strong.”
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Powell’s comments to the Senate finance committee underscored the central bank’s delicate balancing act as it debates when to cut the key interest rate from 5.25 percent to 5.5 percent — a range it has held since last July.
Cutting rates too soon could derail plans to tame inflation. Keeping them too high for too long could push more Americans into unemployment than necessary.
Powell addressed the trade-off in his opening remarks, warning that a policy misstep could stall or reverse recent progress in inflation. However, he added that “increased inflation is not the only risk we face”, citing concerns that leaving borrowing costs too high for too long could “unnecessarily” damage the economy.
“We’re very aware that we have two-way risks right now,” he added later after being urged by Sherrod Brown, the Democratic chairman of the Senate Finance Committee, not to put American jobs at risk.
Powell said policy decisions would be made “meeting by meeting,” though he indicated the Fed’s next move was more likely to be a rate cut than a rate hike.
The “possible direction” would be for the bank to “start[s] to loosen policy at the right time,” provided inflation continues to fall lower and the labor market remains strong, the Fed chairman said in response to questions from Rhode Island Sen. Jack Reed.
Officials remain on edge after inflation flared earlier this year, dashing expectations that the Fed would begin cutting rates before the summer. That has left policymakers eager for more evidence of disinflation before cutting borrowing costs.
Recent signs of a cooling labor market, however, have bolstered expectations for a fall in borrowing costs after the summer. The unemployment rate now stands at 4.1 percent, a level last recorded in November 2021. Those conditions point to a labor market that is “strong but not overheated,” Powell said Tuesday.
Officials have pointed out recently — including minutes from the most recent meeting in June — that a sudden weakening of the labor market could also push the Fed to lower rates.
Traders generally do not expect the Fed to cut borrowing costs when policymakers meet later this month, but are betting that a cut in September is more likely than not. As of June, officials themselves predicted an interest rate cut this year, although a large portion also supported an additional move.
The September meeting marks the last Fed meeting before the presidential election in November, after which the central bank will meet twice more this year. Inflation and punishing borrowing costs are among the top issues for voters, weighing on President Joe Biden’s approval ratings.
Powell also faced questions about the Fed’s proposed changes to bank capital rules, which have faced intense criticism from Wall Street and Republican lawmakers for being too onerous.
The chairman indicated that the central bank would accept new feedback on a revised proposal, given the possibility of “material” changes to the initial parameters.