Federal Reserve Chairman Jerome Powell said on Wednesday he is not yet ready to declare that inflation has been conquered but believes the U.S. remains on a path to continued price stability and low unemployment.
Powell and other Fed officials have said they won’t cut interest rates until they have more confidence that inflation, which has spiked during the pandemic, will return to the central bank’s 2% target.
Asked directly at a congressional hearing whether he felt the barriers to lowering rates had been removed, Powell said, “I certainly have some confidence in that regard,” but added, “I’m not ready to say that yet.” But recent data suggests the Fed is close to that point, Powell told lawmakers on the House Financial Services Committee.
Powell said he still felt the U.S. was headed for a so-called soft landing, in which the Fed’s inflation target is met without a sharp rise in unemployment — an accomplishment that many thought impossible when inflation hit a 40-year high in 2022 and the Fed responded by rapidly tightening borrowing costs.
“There is a path to returning to full price stability while keeping unemployment low,” Powell said. “We are on that path, and we’re very focused on staying on that path.”
The Fed’s preferred inflation gauge, the personal consumption expenditures price index, was at 2.6% in May, and Powell reiterated that the central bank would need to cut rates before that figure fully returns to 2%, but after underlying momentum appears likely to reach 2%.
It was Powell’s second day of testimony before Congress, a semi-annual session that reviews the state of the economy and monetary policy and typically involves grilling by lawmakers on regulatory and other issues.
Republicans, as they did at a Senate Banking Committee hearing on Tuesday, questioned Powell about proposed banking regulations that have drawn opposition from industry and GOP officials.
Democrats have sought to draw Trump on issues such as proposals by a Republican-backed group called Project 2025 that could reform and weaken the Fed.
When asked about the Federal Reserve’s current congressionally mandated mandate to maintain both price stability and full employment, Chairman Powell said he thinks the current system serves the Fed well. Some critics of this dual mandate believe the Fed should focus only on inflation.
Powell said the dual mandate “has been a good thing” and hasn’t prevented the Fed from doing what’s needed to address rising prices.
Asked about a series of changes to the Fed’s monetary policy strategy in 2020 that allowed it to compensate for periods of low inflation with higher inflation, Powell said they were approved at a time when low interest rates appeared to be prevalent.
Since then, “the neutral rate should have risen in the near term,” Powell said, noting that the “container” benchmark rate, set at a range of 5.25% to 5.5% since July 2023, is being used to keep inflation in check.
His other comments on Tuesday were in line with a Senate hearing on Tuesday and signaled both growing confidence in continued falling inflation and growing sensitivity to the risks of keeping monetary policy too tight for too long and slowing the economy more than necessary.
The U.S. unemployment rate is currently 4.1%, a number that Powell said is low by historical standards but has been creeping up over the past year and is above the level that many economists and Fed officials consider to represent sustainable full employment.
Powell also told House lawmakers on Tuesday that “when we have more and better data” the case for the central bank to cut interest rates will be stronger.
He also said the endpoint of quantitative tightening remains unclear and the Fed has “a long way to go” in reducing the size of its balance sheet.
Powell said the Fed has already reduced the size of its assets by about $1.7 trillion but would be cautious in pausing the reductions to ensure financial institutions have adequate reserves.
“We’ve made a lot of progress, but we feel like we still have a long way to go,” Powell said.
The Fed has expanded its balance sheet in response to the coronavirus pandemic to keep long-term interest rates down and support the economy, and is currently redeeming up to $25 billion in Treasury securities and $35 billion in mortgage-backed securities as they mature.
