Fed Chair Jerome Powell talks interest rates and inflation

Federal Reserve Chairman Jerome Powell told Congress on Tuesday that the labor market “has slowed really significantly across a number of measures,” which development economists say could make the central bank more likely to cut interest rates soon.

However, Powell added: “I will not be sending any signal today about the timing of future action.”

Powell, speaking before the Senate Banking Committee, has repeatedly noted 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 stable prices and maximum employment.

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

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 since November 2021 – from 4% in May and 3.7% at the start of the year, Powell said the rate “remains at a low level.”

“Labor market conditions have cooled while remaining 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 be mindful of the political implications of cutting rates so soon before a presidential election.

“I worry that if the Fed waits too long to cut rates, the Fed 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?

A report on Friday showed the economy created a robust 206,000 new jobs in June but the private sector added just 136,000 and the previous two-month total was revised sharply down. Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the average of 146,000 jobs created over the past three months represents the weakest performance since early 2021.

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 the unemployment spike becomes self-perpetuating, 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 the strong average of 222,000 monthly jobs added in the first half of the year.

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

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

“The Fed stated that we do not expect it would 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 incoming data for the first quarter of this year did not support such greater confidence.”

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

He also said, “If we see the labor market weaken unexpectedly, we can also respond to that” by lowering interest rates.

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

Is inflation declining in the United States?

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

But Powell has maintained a cautious stance on cutting interest rates since inflation unexpectedly rose in the first quarter after a sharp slowdown last year.

From March 2022 to July 2023, the Fed raised its key interest rate from near zero to a range of 5.25% to 5% — the highest level in 23 years — in an attempt to tame the surge in inflation caused by the pandemic.