Inflation has eased and the job market has returned to the “tight but not overheating” conditions that existed before the coronavirus pandemic threw the U.S. economy into turmoil, the Federal Reserve said in a report to Congress on Friday, documenting a steady return to more normal conditions in the aftermath of the health crisis.
“Inflation moderated significantly last year and has continued to improve moderately this year,” the Federal Reserve said in its latest monetary policy report to Congress, noting that it would only be a matter of time before the pace of price increases in one key area – housing services – returned to pre-health crisis levels.
Meanwhile, the labor market “continued to rebalance over the first half of the year,” the report said. “Due to falling job vacancies in many sectors of the economy, labor demand has moderated, while labor supply has continued to increase, supported by a surge in immigration.”
“The balance between labor demand and supply appears similar to the period immediately prior to the pandemic, when the labor market was relatively tight but not overheated. Nominal wage growth continued to slow,” the report said.
The twice-yearly report to Congress comes ahead of two days of testimony by Fed Chairman Jerome Powell scheduled for Tuesday and Wednesday next week that is likely to focus on the central bank’s monetary policy plans heading into a sensitive election season.
Job growth has been slowing, and the unemployment rate has been rising steadily from 3.5% in July last year to 4.1% as of June.
Inflation, measured by the Fed’s key personal consumption expenditures price index, has been hovering around 2.6%, which policymakers still consider “high,” but is approaching the point where it may no longer be so.
New inflation data is due to be released on Thursday, and if price pressures continue to ease, Fed officials could pave the way for at least a rate cut as early as September. Powell and his colleagues have said the decision would be based solely on the state of the economy, not how it might affect the political outlook in either party.
But Democrats and Republicans alike are likely to question Powell on that very issue.
The Fed left interest rates unchanged at 5.25% to 5.50% at its last policy meeting in June, and policymakers’ latest projections call for lowering their forecast for rate cuts this year to one from three.
But financial markets and some policymakers still expect the Fed to cut rates by two quarter-points each by the end of the year.
Already, many Democrats have grilled Powell about high interest rates, complaining that they are making it even harder for low- and middle-income families to buy homes.
Republicans, on the other hand, have been critical of the Fed’s initial slow response to inflation and could lash out if Powell hints at cutting rates ahead of the November election.
