Federal Reserve Chairman Jerome Powell told Congress on Tuesday that the labor market “has cooled really significantly” recently. The development could make the central bank more likely to cut interest rates soon, economists say, although Powell repeatedly said he did not want to send a signal about the timing of rate cuts.
“We’ve seen the labor market really cool significantly in so many measures,” Powell told the Senate banking committee. He said this was a significant change since he last testified before the jury in March.
However he added, “I will not send any signal today about the timing of future action.”
However, Powell noted several times that the central bank faces more balanced risks between cutting rates too quickly and rekindling inflation, waiting too long and weakening the economy and labor market. The Fed’s mandates are to achieve stable prices and maximum employment.
“We see the two terms more balanced than they were a year ago,” he said. “We have to be focused on both.”
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In a note to clients, Ryan Sweet, chief US economist at Oxford Economics, said the evidence provided “further evidence that the central bank is moving closer to cutting interest rates”. He added that the research firm is “increasingly confident” that the Fed will begin cutting rates at a meeting in mid-September.
In his prepared testimony, Powell struck a cautious tone, reiterating that officials do not expect to cut interest rates until they have “gained greater confidence that inflation is moving steadily toward” the central bank’s 2% target. .
And although the jobless rate rose to 4.1% in June – the highest since November 2021 – from 4% in May and 3.7% earlier in the year, Powell said the rate “was still at a low level”.
“Labor market conditions have cooled while remaining strong,” Powell said.
Some Democrats urged Powell to move quickly to cut rates to ensure the labor market and economy don’t falter. Some Republicans said the Fed should ensure inflation is gone before acting and should be mindful of the political implications of cutting rates just before the presidential election.
“I’m concerned if the Fed waits too long to cut rates, the Fed could undo the progress we’ve made in creating good jobs,” Powell told Sen. Sherrod Brown, D-Ohio.
How is the current job market?
A report on Friday found the economy added 206,000 new jobs in June, but the private sector added only 136,000 and the totals for the previous two months were revised down sharply. On average, the 146,000 positions created by businesses over the past three months is the weakest performance since the start of 2021, noted Ian Shepherdson, chief economist at Pantheon Macroeconomics.
Annual wage growth, which feeds inflation, fell from 4.1% to 3.9%, the slowest pace in three years.
“The main risk now is that rising unemployment becomes self-sustaining, as consumers become more cautious and businesses no longer fear being unable to rehire if they lay off underutilized workers,” Shepherdson wrote in a note to clients.
However, in his prepared testimony, Powell pointed to a steady average of 222,000 monthly jobs added in the first half of the year.
The Fed raises interest rates to raise borrowing costs for mortgages, credit cards and other types of credit, reducing economic activity and inflation. It cuts rates to lower those costs and ease the economy or help it out of a recession.
Powell’s remarks largely echoed those he made after a Fed meeting last month and at a forum of central bankers in Portugal last week.
“(The Fed) has stated that 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 written testimony. “Incoming data for the first quarter of this year does not support such greater confidence.”
Powell acknowledged that recent inflation readings “have shown modest progress, and more good data would strengthen our belief that inflation is moving steadily toward 2%.”
He added, “We continue to make decisions meeting after meeting.”
He also said, “If we were to see the labor market weaken unexpectedly, we could also respond to that” with lower rates.
Powell acknowledged that cutting rates too quickly “could stop or even reverse the progress we’ve seen in inflation.” But waiting too long “could unnecessarily dampen economic activity and employment.”
Many economists and futures markets expect the Fed to start cutting its key rate in September.
Is inflation easing in the US?
Recent reports indicate that inflation eased significantly in May, with a key measure the Fed closely follows at 2.6%. That’s above the Fed’s 2% target, but the lowest since March 2021 and down from a peak of 5.6% in mid-2022.
But Powell has taken a cautious stance on rate cuts since inflation rose unexpectedly in the first quarter after a significant slowdown last year.
From March 2022 to July 2023, the Fed raised its benchmark interest rate from near zero to a range of 5.25% to 5% – a 23-year high – in an effort to moderate a rise in inflation caused by from the pandemic.