Federal Reserve Chair Jay Powell indicated that the central bank is moving closer to considering interest rate cuts, encouraged by signs of cooling inflation. Powell noted that recent inflation data “have shown some modest further progress” and that additional positive data would strengthen the Fed’s confidence that inflation is sustainably moving towards the 2% target. He made these remarks during his testimony before US lawmakers on Tuesday, with a subsequent appearance scheduled before the Senate Banking Committee today and the House Financial Services Committee tomorrow as part of his semiannual congressional testimony.
Powell hinted that the conditions for rate cuts are improving, citing a cooling jobs market that has garnered attention from policymakers. “The most recent labor market data do send a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago,” he stated. “This is no longer an overheated economy.” He added that the risks associated with meeting the Fed’s dual mandates of maximum employment and stable prices are “coming much more into balance.”
This marked the second time in a week that Powell expressed optimism about the inflation outlook. Last Tuesday, he highlighted that recent inflation readings suggest a return to a disinflationary path. The next inflation report, based on the Consumer Price Index (CPI), is expected on Thursday. While it is not anticipated to show worsening inflation, it is also not expected to decrease, with “core” CPI inflation projected to remain steady at 3.4% in June.
In his prepared testimony, Powell emphasized the Fed’s commitment to making monetary policy decisions on a meeting-by-meeting basis. He warned that lowering rates too quickly could undermine progress in reducing inflation, while keeping rates high for too long could harm the economy and job market.
During his testimony, Powell faced questions from both Democrats and Republicans. Democrats inquired about potential rate cuts, while Republicans focused on proposed bank capital rules that would require large US banks to hold greater buffers against losses. Powell indicated that regulators are discussing changes to the proposal, with a final determination expected early next year.
Powell also reaffirmed the importance of the Fed’s independence from political influence, stating, “I think it’s essential,” and noting that this is “pretty broadly understood” by lawmakers from both parties.
Some Fed watchers have called for a rate cut in September following an unemployment report showing a slight increase in the unemployment rate to 4.1%. While this rate remains historically low, it is up from 3.4% early last year. Powell attributed the rise to an increase in the supply of workers entering the job market rather than a sign of economic deterioration. He has previously stated that a slight increase in the unemployment rate above 4% is unlikely to trigger a rate cut, with a broader weakening of the job market being more likely to prompt policy easing.
The Fed raised its inflation outlook at its last policy meeting earlier this month to 2.8% from 2.6% and reduced its projection for rate cuts this year from three to one. Investors are betting on a better than 70% chance of a rate cut in September, but Powell declined to specify the timing of any future actions, saying, “Today I am not going to be sending any signals about the timing of any future actions.”