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US Federal Reserve Chairman Jay Powell said the central bank had made “significant progress” in its mission to curb inflation but was looking for “more good data” before cutting interest rates from their 23-year highs.
Powell, in written testimony to the US Congress released on Tuesday, was optimistic that the US economy is returning to a better balance as the Fed tries to push inflation back to its 2 percent target.
Recent 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 confidence that inflation is moving steadily towards 2 percent.”
“Over the past two years, the economy has made significant progress” toward the Fed’s inflation target, he said, adding that labor market conditions “have cooled but remained 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 its benchmark interest rate from 5.25 percent to 5.5 percent, the 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 put more Americans out of work than necessary.
Powell addressed the trade-off in his opening remarks, warning that a policy misstep could halt or reverse recent progress in inflation. But he added that “increased inflation is not the only risk we face”, citing concerns that leaving borrowing costs too high for too long could “disproportionately” damage the economy.
“We are very aware that we now have mutual risks,” he added later, after Sherrod Brown, the Democratic chairman of the Senate Finance Committee, urged him not to jeopardize American jobs.
Powell said policy decisions would be made “meeting by meeting,” though he indicated the Fed’s next move would be to cut rates rather than raise them.
The “likely direction” would be that the bank “begins[s] to ease policy at the right time,” assuming inflation continues to fall and the labor market remains strong, the Fed chairman said in response to questions from Sen. Jack Reed of Rhode Island.
Officials remain jittery after inflation flared earlier this year, undermining expectations that the Fed would start cutting rates before the summer. Policymakers were eager for more evidence of disinflation before cutting borrowing costs.
However, recent signs of cooling in the labor market have reinforced expectations of a fall in borrowing costs after the summer. The unemployment rate now sits at 4.1 percent, the level last registered in November 2021. These conditions point to a labor market that is “strong but not overheated,” Powell said on Tuesday.
Officials have recently emphasized — including in the minutes of the last June meeting — that the sudden weakening of the labor market could also prompt the Fed to cut rates.
Traders generally don’t expect the Fed to cut borrowing costs when policymakers meet later this month, but are betting a cut in September is more likely than not. As of June, officials themselves had forecast one rate cut this year, though much also supported another move.
The September meeting is the last Fed meeting before the November presidential election, after which the central bank will meet twice more this year. Inflation and punishing borrowing costs are among the top issues weighing on President Joe Biden’s approval ratings for voters.
Powell also faced questions about the Fed’s proposed changes to bank capital rules, which have faced intense opposition from Wall Street and Republican lawmakers for being too onerous.
The chairman said that the central bank will accept new feedback on the revised proposal, taking into account the likelihood of “significant” changes to the original parameters.