Federal Reserve Chair Jerome Powell on Tuesday said the trade-offs between bringing inflation down and maintaining a solid labor market are changing – a significant pivot that may signal the central bank could finally start slashing interest rates.
“Elevated inflation is not the only risk we face,” Powell told the Senate Banking Committee during the first of two days of testimony Tuesday. “We’ve seen that the labor market has cooled really significantly across so many measures.…It’s not a source of broad inflationary pressures for the economy now.”
Powell would not hint at when the Fed would slash rates – which many on Wall Street and in the Democratic ranks have hoped would begin in September, ahead of the presidential election – but he did say the 23-year high rates likely aren’t going to increase.
“It doesn’t seem likely that the next policy move would be a rate increase,” Powell said.
Behind the shifting outlook is labor-market data showing a slowdown in hiring and a mild but steady increase in the share of Americans looking for work amid an increase in the workforce, due partly to more immigration.
The economy has continued to add more than 200,000 jobs a month, on average, this year. But the unemployment rate has inched up — to 4.1% in June from 3.7% in December, according to last week’s report.
Powell described the job market as roughly back to conditions seen before the pandemic hit, when it was “strong, but not overheated.”
Meanwhile, inflation fell to 2.6% in May, according to the Fed’s preferred gauge, down from 4% one year earlier but still above the Fed’s 2% target.
The Fed raised rates at the fastest pace in 40 years in 2022 and 2023 to combat inflation that also rose to a four-decade high. Officials have held their benchmark rate in a range between 5.25% and 5.5% since last July.
Central bankers are expected to keep the rate the same when they meet at the end of the month.
“We are well aware that we now face two-sided risks,” and can no longer focus solely on inflation, Powell told the committee. “The labor market appears to be fully back in balance.”
Still, with a Nov. 5 presidential election on the horizon and just two scheduled Fed meetings before it, Powell was quizzed by Democrats about the risks to the job market of not cutting rates soon, and by Republicans about the pain to households of inflation that remains above the central bank’s 2% target.
“Any move to lower rates before Nov. 5 would be a bad perception,” Sen. Kevin Cramer (R-ND) said to Powell in remarks that went on to pledge support for central bank independence.
It was one of several moments in the hearing that, explicitly or not, were framed by the presidential vote, the political sensitivity of coming Fed decisions, and suggestions by some close to Republican candidate and former President Donald Trump that the Fed should be brought under tighter political oversight — a counter to widely accepted norms.
Powell throughout the hearing emphasized the importance of Fed independence in rate setting, as well as his own intent to stick with data-based decision-making.
Following Powell’s comments investors continued to put a nearly 70% probability on a Fed rate cut in September.
“He’s beginning to tee up a rate cut,” said Brian Jacobsen, chief economist with Annex Wealth Management in Brookfield Wisconsin. “They view risks in not cutting soon enough.”
At the Fed’s June 11-12 meeting the median projection of 19 officials was for just a single quarter-point rate cut by the end of the year, but since then inflation data has come in weaker than expected.
The inflation target is set in reference to the Personal Consumption Expenditures price index, which as of May was increasing at a 2.6% year-over-year rate.
In a report to Congress released on Friday ahead of Powell’s testimony, the Fed noted that there was good reason to believe that price pressures, particularly in the housing market, a significant contributor to inflation’s recent persistence, were in decline.
Combined with concerns about the job market, that should “leave the Fed fretting more about the risk of recession than of sticky inflation,” economists at Pantheon Macroeconomics wrote after the last jobs report.
Officials were surprised in the second half of last year by how rapidly price growth slowed despite strong spending and hiring, leading them to shift their attention away from how high to raise rates and toward how long to wait before cutting them. When Powell last appeared before lawmakers in early March, he hinted that the Fed would be able to cut rates by June if price growth slowed. Inflation picked up in the first quarter, derailing any such plan.
The inflation whiplash has left the Fed in an awkward holding pattern, where policymakers are looking for either several more months of convincingly benign inflation readings or evidence of meaningful weakness in hiring and economic activity before lowering rates.
Pressed over whether he had greater concerns about larger increases in unemployment, Powell said, “Absolutely I do. Even more so than in March, when we were here.”
With Post wires
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