The Fed’s Powell says more ‘good’ inflation data would strengthen the case for rate cuts

Chairman of the Federal Reserve Jerome Powell said on Tuesday that policymakers were encouraged by recent data suggesting that inflation is easing and that continued progress would strengthen the case for an interest rate cut.

“Incoming data for the first quarter of this year do not support such increased confidence. The latest inflation readings, however, have shown modest further progress and more good data would strengthen our belief that inflation it’s moving steadily toward 2 percent.” Powell said in prepared remarks for testimony before the Senate Banking Committee.

The Fed chief is on Capitol Hill for the first of two days of his semiannual monetary policy testimony. He is scheduled to appear before the House Financial Services Committee on Wednesday.

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Powell also said officials are trying to balance the risks between cutting interest rates too soon, which risks reinstating inflation, or waiting too long to cut rates, which could weigh on the economy and possibly trigger a recession.

“In light of the progress made in both reducing inflation and cooling the labor market over the past two years, rising inflation is not the only risk we face,” he said. “Easing policy restraint too late or too little could unnecessarily weaken economic activity and employment.”

Officials voted at their most recent meeting in May to keep interest rates steady in a range of 5.25% to 5.5%, the highest level since 2001. Although policymakers left the door open to cutting rates further late this year in their post-meeting statement, they also stressed the need for “greater confidence” that inflation is coming down before easing policy.

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Since then, there has been some evidence that inflation is starting to moderate again. May’s personal consumption expenditure index showed that inflation had eased to 2.6%, from a peak of 7.1%. At the same time, core prices — which are watched more closely by the Fed because they strip out volatile measures such as food and energy — also rose 2.6%, the slowest annual rate since March 2021.

“After missing progress toward our 2 percent inflation target earlier this year, the latest monthly readings have indicated modest further progress,” Powell said.

Most investors now expect the Fed to start cutting rates in September or November and are expecting just two cuts this year — a dramatic shift from earlier in the year, when they predicted six interest rate cuts starting in March.

Powell did little in his testimony Tuesday or in subsequent questions to counter those expectations.

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Higher interest rates tend to create higher rates on consumer and business loans, which then slow the economy by forcing employers to cut spending. The higher rates helped push the average 30-year mortgage rate above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, car loans and credit cards have also risen.

Powell also faced questions about the state of the U.S. housing market, which has seen prices rise amid a persistent shortage of inventory. Sen. Sherrod Brown, D-Ohio and chairman of the Senate Banking Committee, suggested the Fed is playing a role in the housing crisis by keeping interest rates at a 23-year high, which in turn is keeping interest rates up. high mortgages.

“For housing supply, the best thing we can do is control inflation so rates can come down,” Powell said. “Policies to increase the supply of housing are not really in the hands of the Fed, they are in the hands of the legislatures, state and federal.”