Washington City
CNN News
—
Inflation has come on strong since hitting a four-decade peak two years ago, Federal Reserve Chairman Jerome Powell said Tuesday. But central bank officials still want to see more progress before cutting interest rates, he said, even as they continue to watch the jobs market.
“We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have greater confidence that inflation is moving sustainably toward 2 percent,” Powell said in prepared testimony submitted to congressional lawmakers. During the hearing, Powell did not specifically mention that a cut this year was still possible, or provide any hints about the timing of the first rate cut, a departure from previous comments he has made.
“However, the latest inflation readings suggest some further modest progress, and better data would strengthen our belief that inflation is moving sustainably towards 2%,” he added.
Powell appears before the Senate Banking Committee on Tuesday to deliver his semiannual monetary policy report to Congress. He will appear before the House Financial Services Committee on Wednesday to discuss the same report on the state of the U.S. economy.
The Fed’s benchmark interest rate, which influences borrowing costs across the economy, has been at a 23-year high for about a year now, as the central bank aggressively raises rates to cool inflation. While the pace of price increases is set to slow dramatically in 2023, it hit a snag earlier this year, delaying the timing of the first anticipated rate cut. Fed officials are projecting just one rate cut this year, according to their latest economic projections in June, compared with three cuts they forecast in March.
Inflation returned to a downward trend in the spring, but officials appear to agree that they need more evidence that inflation is actually heading toward the 2% target. In June, consumer prices did not 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 annualized PCE inflation rate was 2.6% in June, down slightly from 2.7% in May.
“Inflation is now around 2.5 percent, so we’ve made 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 long way to go to get to the 2 percent target on a sustained basis.”
But inflation isn’t the only thing the Fed is watching as it considers when to start cutting rates. The Fed is watching America’s long-strong job market show signs of easing. That comes as U.S. consumers show signs of slowing down after years of high inflation and sharply rising interest rates, according to the latest shopping data and statements from retailers.
Here are the main points from Powell’s hearing before the Senate Banking Committee.
The Fed’s top official told senators that the U.S. job market now looks similar to how it did before the Covid-19 pandemic: “strong, but not overheated.” The U.S. job market rebounded strongly from a brief pandemic-induced recession in 2020, and has been growing steadily since then. But it has slacked off recently: The unemployment rate climbed to its highest level in more than two years last month, and new applications for unemployment benefits have increased in recent weeks.
“I worry that if the Fed waits too long to lower rates, it 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 U.S. job market remains a pillar of strength for the broader economy, but it’s not moving at the same pace as it did a few years ago. The unemployment rate rose to 4.1% in June, the highest level since November 2021, even as employers continue to hire at a brisk pace. The gap between job openings and the number of unemployed looking for work, a measure of how tight the labor market is, has narrowed significantly over the past year.
Powell said during the hearing that the Fed fully recognizes that it faces a “double-pronged risk” — one that inflation will re-emerge because the central bank cuts rates too quickly, and the other that the labor market will weaken sharply because the Fed waits too long to cut rates. Both risks will have consequences for Americans and the U.S. economy as a whole.
The Fed is tasked by Congress with stabilizing prices and maximizing employment, and it balances its focus on the two goals depending on the state of the economy at the time. For many years, the Fed focused more on the inflation side of its dual mandate, but that has changed recently.
“If we see the labor market weaken unexpectedly, which is more than what we’ve seen materially unexpectedly,” Powell said, “then we can respond to that, too, because we have a dual mandate and we see those two mandates more balanced now than they were a year ago.”
The engine of the American economy, consumer spending, has begun to show some cracks. Sales at U.S. retailers have been consistently lower than expected for months now, and retailers have sounded the alarm about shoppers across the income spectrum turning to cheaper alternatives. A recent survey of service providers in the United States showed that consumer demand so far this summer has been tepid, a stark contrast to last year when Americans splurged.
Overall, a recent batch of economic data is helping build the case for the Fed to start lowering borrowing costs.
The Fed chief told lawmakers that a series of proposed banking rules would likely be revised and re-introduced — a topic Republicans have repeatedly raised with Powell. Meanwhile, some Democrats have spoken out about rules on compensation for Wall Street executives.
The Fed is one of the nation’s primary banking regulators, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. After the Great Recession, banking authorities around the world gathered in Basel, Switzerland, to develop global standards for banks to strengthen financial stability. Those rules are still being adopted and implemented.
The final phase of banking regulation is known as the Basel III Endgame, and it calls for the largest banks to increase the amount of capital they need to protect themselves from risk. The Fed’s latest so-called “stress test,” a simulation of how big banks would fare in a tough economy, found that all 31 banks tested survived and were still able to make loans. But they were taking a bigger financial hit than they did last year. When the Basel III Endgame was proposed last year, banking interest groups and lawmakers from both parties pushed back, saying that requiring banks to raise more capital than they currently need would hurt their ability to make loans.
Powell said Tuesday that “the view held by board members is that we need to put forward a revised proposal for comment at some point.” It was not clear what changes the new proposal would make.
Sen. Elizabeth Warren of Massachusetts grilled Powell on a long-delayed rule aimed at curbing reckless behavior on Wall Street related 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 usually a challenge, especially given intense lobbying efforts.
“The Fed has refused to join other financial regulators in finalizing rules implementing Section 956 as directed by Congress,” Warren said, referring to comments Powell has made in the past that he would like to see evidence of problems that Section 956 could solve.
Powell said he “never said he trusted banks to regulate themselves.”
