Fed Chair Jerome Powell Talks Interest Rates, Inflation

Federal Reserve Chairman Jerome Powell told Congress on Tuesday that the labor market has “slowed down really dramatically” recently. Economists say the development could make the central bank more likely to cut interest rates soon, though Powell has repeatedly said he doesn’t want to send a signal about the timing of a rate cut.

“We have seen the labor market slow down significantly across a number of measures,” Powell told the Senate Banking Committee, saying that was a notable change since his last testimony before the committee in March.

But he added, “I will not send any signal today about the timing of future action.”

But Powell has repeatedly indicated that the central bank faces a more balanced risk between cutting rates too soon and reigniting inflation, and waiting too long and weakening the economy and labor market. The Fed’s mandate is to achieve price stability and maximum employment.

“We see the two states as more balanced than they were a year ago. We need to focus on both,” he said.

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In a note to clients, Ryan Sweet, chief U.S. economist at Oxford Economics, said the testimony provides “further evidence that the central bank is getting closer to cutting rates.” He added that the research firm is “increasingly confident” that the Fed will start cutting rates at its mid-September meeting.

In his prepared testimony, Powell struck a cautious tone, reiterating that officials do not expect to cut interest rates until they “gain greater confidence that inflation is moving sustainably toward” the central bank’s 2% target.

Although the unemployment rate rose to 4.1% in June — the highest level since November 2021 — from 4% in May and 3.7% earlier in the year, Powell said the rate “remains at a low level.”

“Labor market conditions have slowed but remain strong,” Powell said.

Many Democrats have urged Powell to move quickly to cut interest rates to ensure the labor market and economy don’t falter. Some Republicans have said the Fed should ensure inflation is under control before acting and should consider the political consequences of cutting rates so soon before a presidential election.

“I worry that if the Fed waits too long to cut rates, it could undo the progress we’ve made in creating good jobs,” Sen. Sherrod Brown, D-Ohio, told Powell.

What is the current job market like?

The economy created a robust 206,000 new jobs in June, but the private sector added just 136,000, a sharp revision to the previous two months’ totals, a report released Friday showed. The average 146,000 jobs added by companies over the past three months represents the weakest performance since early 2021, noted Ian Shepherdson, chief economist at Pantheon Macroeconomics.

Annual wage growth, which feeds inflation, fell from 4.1% to 3.9%, the slowest rate in three years.

“The main risk now is that the unemployment spike becomes self-perpetuating, as consumers become more cautious and companies 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 strong average of 222,000 jobs added per month during the first half of the year.

The Federal Reserve raises interest rates to increase the cost of borrowing on mortgages, credit cards, and other types of loans, which slows economic activity and inflation. It lowers interest rates to lower these costs and stimulate the economy or help it pull out of a recession.

Powell’s comments are largely consistent with those he made after last month’s Fed meeting and at a central bankers’ forum in Portugal last week.

“The Fed stated that it does not expect it to be appropriate to lower the target range for the federal funds rate until we have greater confidence that inflation is moving sustainably toward 2 percent,” Powell said in his written testimony. “The data for the first quarter of this year did not support such greater confidence,” he added.

Powell acknowledged that recent inflation readings “have shown some modest progress, and more good data would bolster our confidence that inflation is moving sustainably toward 2 percent.”

“We continue to make decisions meeting after meeting,” he added.

He also said: “If we see the labor market weakening unexpectedly, we may respond to that as well” by lowering interest rates.

Powell acknowledged that cutting interest rates too early “could derail or even reverse the progress we’ve seen on inflation.” But waiting too long “could unduly weaken economic activity and employment.”

Many economists and futures markets expect the Federal Reserve to begin cutting key interest rates in September.

Is inflation declining in the United States?

Recent reports confirm that inflation eased significantly in May, with the Fed’s closely watched headline inflation rate coming in at 2.6%. That’s above the Fed’s 2% target but the lowest since March 2021 and below a peak of 5.6% in mid-2022.

Cheryl Riley

“Amateur organizer. Wannabe beer evangelist. General web fan. Certified internet ninja. Avid reader.”

Fed Chair Jerome Powell Talks Interest Rates, Inflation

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