Inflation has come a long way since reaching a four-decade peak two years ago, Federal Reserve Chair Jerome Powell said Tuesday. However, central bank officials still want to see more progress before cutting interest rates, he noted, though they are also keeping a close eye on the job market.
“We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” Powell said in prepared testimony submitted to congressional lawmakers. During the hearing, Powell didn’t specify that cutting this year remains likely, or give any hint about the timing of the first rate cut, which is a departure from previous comments he’s made.
“The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%,” he added.
Powell appeared Tuesday before the Senate Banking Committee to deliver his semiannual monetary policy report to Congress. He heads to the House Financial Services Committee on Wednesday to address the same report on the state of the US economy.
The Fed’s key interest rate, which influences borrowing costs across the economy, has been at a 23-year high for about a year now, after the central bank aggressively lifted rates to bring down inflation. While the pace of price hikes slowed dramatically in 2023, it hit a snag early this year, which pushed back the timing of the first anticipated rate cut. Fed officials expect to cut interest rates just once this year, according to their latest economic projections in June, compared to the three cuts they forecast in March.
Inflation resumed a downward trend in the spring, but officials appear to be in lockstep saying they need more evidence that inflation is truly headed toward their 2% goal. In June, consumer prices didn’t rise on a monthly basis for the first time since November, according to the Fed’s favorite inflation gauge, the Personal Consumption Expenditures price index. The annual PCE inflation rate registered at 2.6% in June, down slightly from 2.7% in May.
“Inflation is now around 2-and-a-half percent, so we have seen significant progress in bringing it down,” New York Fed President John Williams said last week at an event in India. “But we still have a way to go to reach our 2% target on a sustained basis.”
But inflation isn’t the only thing the Fed is watching as it mulls when to begin cutting interest rates. The Fed is watching America’s long-robust job market closely after it has shown signs of cooling. That comes as US consumers show signs of pulling back after years of elevated inflation and a sharp rise in interest rates, according to the latest spending data and remarks from retailers.
Here are key takeaways from Powell’s hearing before the Senate Banking Committee.
Powell says the labor market is back to normal — but there are still risks
The Fed’s top leader told senators that America’s job market now looks similar to the way it did before the Covid-19 pandemic: “strong, but not overheated.” The US job market rebounded mightily after a brief, pandemic-induced recession in 2020, and it has continued to expand ever since. But it has loosened a little recently: The unemployment rate last month crept up to its highest level in more than two years, and new applications for unemployment benefits have trended up in recent weeks.
“I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made in creating good-paying jobs,” Sen. Sherrod Brown of Ohio, who chairs the Senate Banking Committee, said during the hearing.
The US job market is still a pillar of strength for the broader economy but it’s not running at the same red-hot pace of a few years ago. The unemployment rate edged higher, to 4.1%, in June, the highest rate since November 2021, though employers have continued to hire at a brisk pace. The gap between job openings and the number of unemployed people seeking work, a measure of how tight the labor market is, has narrowed markedly over the past year.
Powell expressed throughout the hearing that the Fed is fully aware that it is dealing with “two-sided risks” — one is of inflation heating back up because the central bank cut rates too soon, and the other is of the labor market weakening sharply because the Fed waited too long to cut rates. Both risks would result in consequences for Americans and the overall US economy.
The Fed is tasked by Congress to both stabilize prices and maximize employment, and it balances its focus on either goal depending on the economic circumstances at the time. For a few years, the Fed has focused more on its inflation side of its dual mandate, but that has shifted recently.
“If we see that the labor market were weakening unexpectedly, which is to say more than what we’ve seen in a material way unexpectedly,” Powell said, “then we could also respond to that, because we have a dual mandate and we now see the two mandates more in balance than they were a year ago.”
America’s economic engine, consumer spending, has started to show some cracks. Sales at US retailers have consistently come in weaker than expected for the past few months and retailers have sounded the alarm on shoppers across the income spectrum trading down for cheaper alternatives. Recent surveys of service-providing businesses in the United States have shown that consumer demand so far this summer has been tepid, a stark contrast to last year when Americans splurged.
Put together, the recent spate of economic data help build a case for the Fed to begin lowering borrowing costs.
Senators talk financial regulation
The Fed chief told lawmakers that a proposed set of banking regulations will likely be revised and re-proposed — a topic Republicans repeatedly brought up with Powell. Meanwhile, some Democrats talked about rules over compensation for Wall Street executives.
The Fed is one of the country’s key banking regulators, in addition to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. In the aftermath of the Great Recession, banking authorities around the world convened in Basel, Switzerland, to develop global standards for banks to fortify financial stability. Those rules are still in the process of being adopted and implemented.
The final phase of these banking rules is known as Basel III Endgame, and it calls on raising the amount of capital that the largest banks hold to protect themselves against risks. The Fed’s latest so-called “stress test,” which is a simulation of how major banks would fare in tough economic conditions, showed that all 31 banks tested would survive and still be able to lend credit. But they took a bigger financial hit than last year. When the Basel III Endgame was proposed last year, bank interest groups and lawmakers from both sides of the aisle pushed back, saying that banks needing to beef up capital beyond what’s currently required would undermine their ability to lend.
Powell said Tuesday a “strongly held view of the members of the board is that we do need to put a revised proposal out for comment for some period.” It’s unclear what changes a new proposal would specifically have.
Sen. Elizabeth Warren of Massachusetts grilled Powell over a long-delayed rule that aims to restrain reckless behavior on Wall Street tied to incentive-based pay for executives, known as Section 956 of the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010. Several regulators, including the Fed, need to figure out how to implement the rule first, but reaching a consensus among them is typically a challenge, especially considering intense lobbying efforts.
“The Fed has refused to join the other financial regulators in finalizing a rule implementing Section 956 as Congress directed,” Warren said. She pointed to a comment that Powell made in the past that he wants to see evidence of the problem that Section 956 would solve.
Powell said that he “never said trust the banks to regulate themselves.”
