Federal Reserve Chairman Jay Powell said he is encouraged by evidence that inflation is subsiding and that more “good data” will help the central bank reach its goals, suggesting the central bank is nearing a point where it would feel comfortable cutting interest rates.
In testimony before Congress, he said inflation was “showing further modest improvement” after a first-quarter rise, and that “as we receive further, better data, we will be more confident that inflation is moving sustainably toward 2 percent.”
Powell spoke before the Senate Banking Committee on Tuesday and is scheduled to testify tomorrow before the House Financial Services Committee as part of his semi-annual congressional appearance.
Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Bank of Washington on June 12. (Photo by Associated Press/Susan Walsh) (AP)
The governor suggested on Tuesday that an environment for rate cuts was on the way, citing a slowing labor market that is also capturing policymakers’ attention.
“The latest labor market data sends a pretty clear signal that labor market conditions are much cooler than they were two years ago,” he said. “The economy is no longer overheating.”
He added that the risks to achieving the Fed’s twin mandates of maximum employment and price stability are “far more balanced.”
Appearing before senators for the second time in the past week, Powell said in a speech in Portugal on Tuesday that the two most recent inflation readings, from April and May, “suggest that we are returning to a deflationary trajectory.”
The next reading on inflation, as measured by the consumer price index, is due to be released on Thursday.
Inflation is not expected to worsen, but it is not expected to fall either. Based on the “core” CPI, which excludes volatile food and energy prices over which the Fed has no control, inflation is expected to stabilize at 3.4% in June, down from the same level in May.
In his prepared remarks, Powell said the Fed would continue to set monetary policy at each meeting, but he reiterated that cutting interest rates too quickly could reverse progress made to contain inflation, while keeping rates high for a long period of time could weaken the economy and job market.
Some Democrats have pressed Powell on whether he will cut interest rates soon, while Republicans have pressed him on a set of bank capital rules proposed by bank regulators last summer that would require big U.S. banks to hold bigger buffers against losses, a proposal that banks have fiercely opposed.
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Powell said bank regulators were discussing changes to the proposal and were close to an agreement, with a final decision possible early next year.
Chairman Powell was also asked about the Fed’s independence, and took time to emphasize the importance of the central bank being independent from political influence.
“I think this is essential,” he said, “and I think it’s pretty widely understood among members of both parties in Congress.”
Some Fed watchers are calling for a rate cut in September after the unemployment rate rose for a second straight month, 0.1 percentage point to 4.1 percent in June, signaling a modest cooling in the labor market.
The unemployment rate remains historically low at 4.1%, but is up from 3.4% early last year.
Powell seems to think that the rising unemployment rate isn’t a sign of a worsening situation, but rather that it’s due to more people entering the labor market and an increase in the supply of workers.
Powell has said in the past that even several spikes in the unemployment rate above 4% would not be a trigger for the central bank to cut interest rates, and a broader weakness in the job market would more likely trigger an easing of policy.
At its last policy meeting earlier this month, the Fed raised its inflation forecast to 2.8 percent from 2.6 percent and lowered its forecast for rate cuts this year to one from three.
Investors see a greater than 70% chance that the Fed will start cutting rates in September.
Powell on Tuesday declined to be specific about when rate cuts might begin.
“We are not sending any signals today as to the timing of any future actions,” he said.
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