Federal Reserve Chairman Jerome Powell said on Tuesday that “more good data” could open the door to cutting interest rates, citing recent reports showing that the labor market and inflation are continuing to cool.
The central bank left its key interest rate unchanged unchanged at the June meeting, and penciled in just one rate cut in 2024 versus his previous forecast of three cuts this year, after digesting data showing inflation remains stubbornly high. After a flurry of rate hikes, the Fed’s federal funds rate since July 2023 has remained in a range of 5.25% to 5.5% – the highest in 23 years.
Speaking Tuesday morning at a Senate Banking Committee hearing, Powell stressed that the central bank wants to see further progress in bringing the annual rate of inflation to around 2% before cutting rates, with the latest price index of consumption at 3.3%. But the chair also noted that the Fed is concerned with the risks of waiting too long to cut rates, noting that “elevated inflation is not the only risk we face.”
“The other likely direction seems to be … that we loosen policy at the appropriate time,” Powell said at the hearing, adding that he believed the Fed would be unlikely to raise rates.
Recent economic indicators suggest “that conditions are back to where they were on the eve of the pandemic: strong but not overheated,” Powell added.
The Fed chairman addressed the Senate panel on the first of two days of biannual congressional testimony. On Wednesday, he will testify before the House Financial Services Committee.
Powell’s comments suggest “a September rate cut remains very much in play,” Capital Economics noted in a research note on Tuesday.
Recent economic data shows some signs of cooling. For example, the unemployment rate, while still low, rose slightly to 4.1% in June, while payroll job gains averaged about 222,000 per month in the first six months of 2024, he added. The gap between jobs and workers has fallen from a pandemic peak and is now at its 2019 level, Powell noted.
The next big piece of economic data the Fed will compile arrives on Thursday with the release of the June consumer price index. Economists expected inflation to rise at an annual rate of 3.1% last month, according to financial data firm FactSet.
“Further progress” on inflation
From March 2022 to July 2023, the Fed raised its benchmark interest rate 11 times to a two-decade high of 5.3% in an effort to quell inflation, which peaked at 9.1% two years ago. These increases raised the cost of consumer borrowing by raising rates on mortgages, car loans, and credit cards, among other forms of borrowing. The goal was to slow borrowing and spending and cool the economy.
On Tuesday, Powell noted that inflation reports covering the first three months of this year did not boost Fed officials’ confidence that inflation was under control.
“However, the latest inflation readings have shown modest further progress,” Powell told the Senate committee, “and more good data would strengthen our belief that inflation is moving steadily toward 2%.”
Gregory Daco, chief economist at consulting firm EY, said he thought Powell’s “greater focus on two-sided risks to the outlook is welcome, albeit a little late.” Daco added that he thinks the Fed should cut its key rate at the July meeting. Otherwise, he suggested, businesses may soon increase layoffs as the economy slows.
However, Powell did not provide what Wall Street investors are watching more closely: a clear indication of the Fed’s timing for a rate cut. But his testimony is likely to bolster expectations among investors and economists that the first cut will come at the central bank’s September meeting.
An independent Fed
In his testimony, Powell also underscored the Fed’s status as an independent institution, which he said “is necessary to take a longer-term perspective” on interest rate policy and inflation. Raising borrowing costs to try to slow price growth is often politically unpopular, and economists have long believed that insulating central banks from political pressures is necessary to enable them to take such steps.
“The idea that the Federal Reserve is setting a marker ahead of the next presidential election is felt,” said Joe Brusuelas, an economist at tax advisory firm RSM.
During his presidency, Donald Trump, in a highly unusual attack by a sitting president, repeatedly denounced Powell, whom he had appointed as Fed chairman, for raising interest rates. Trump has already indicated that he would not reappoint Powell if he is re-elected president.
Asked about the importance of a central bank with independence to set monetary policy, Powell replied: “It’s actually fundamentally, literally fundamental. The good news is that I think it’s widely understood on both sides of the aisle.” .”
He added, “We have to do our job in a way that is outside of the political process.”