Federal Reserve Chairman Jerome Powell told Congress that the U.S. economy is “no longer overheating” and that the job market has “cooled significantly” from pandemic-era extremes and is in many ways back to where it was before the health crisis, suggesting the case for lowering interest rates is strengthening.
“We’re well aware that we now face risks on two sides,” Powell told the Senate Banking Committee on Tuesday, saying the focus can no longer be solely on inflation “running above” the central bank’s 2% target. “The labor market appears to be fully balanced.”
In prepared remarks, Powell told senators that inflation has improved in recent months and that “further, better data will strengthen the case for further monetary easing.”
The Federal Reserve has kept its policy rate in the 5.25% to 5.5% range since July 2023.
Powell’s comments appeared to signal growing confidence that inflation will return to the Fed’s target, contrasting the lack of inflation progress in the first few months of the year with more recent improvements that have helped boost the Fed’s confidence that price pressures will continue to decline.
“After a lack of progress toward our 2 percent inflation goal early this year, recent monthly data suggest modest progress,” Powell said in a speech to the Senate Banking Committee. “As we receive further, better data, our confidence will increase that inflation is sustainably on track to 2 percent.”
The Fed will receive June consumer price information on Thursday.
Friday’s jobs report showed payrolls increased by 206,000 in June, a still-strong figure, but the monthly trend has slowed and the unemployment rate has risen, now to 4.1%.
Powell called it “still at low levels,” but noted that “higher inflation is not the only risk we face, given the progress we have made over the past two years in both containing inflation and cooling the labor market.” Keeping policy too tight “could unduly weaken economic activity and employment,” Powell said, undermining a period of economic growth that he described as “remaining robust” due to “robust” private demand, improving overall supply conditions and a “recovery in housing investment.”
Powell’s comments could bolster expectations for a change in policy statement following the Fed’s July 30-31 meeting that would at least open the door to a September rate cut that investors now see as about a 70% chance, barring an unexpected spike in upcoming inflation measures.
“He’s starting to prepare for rate cuts,” said Brian Jacobsen, chief economist at Annex Wealth Management in Brookfield, Wis. “They see the risk in not cutting rates sooner. Before, they were just focused on inflation.”
At the Fed’s June 11-12 meeting, the average forecast of 19 officials was for just one quarter-point rate cut by the end of the year, but inflation measures since then have been weaker than expected.
The consumer price index did not rise at all in May, and analysts expect new data released on Thursday to show another weak reading.
