Washington
CNN
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Inflation has risen significantly since hitting a four-decade peak two years ago, Federal Reserve Chairman Jerome Powell said Tuesday. But central bank officials still want to see progress before cutting interest rates, he noted, even as they also keep a close eye on the jobs market.
“We do not believe it is 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 say whether a reduction this year remained likely or provide any guidance on the timing of the first rate cut, a departure from his previous comments.
“The most recent inflation figures have, however, shown some modest progress, and further positive data would strengthen our confidence that inflation is moving sustainably towards 2%,” he added.
Powell appeared before the Senate Banking Committee on Tuesday to present his semiannual report on monetary policy 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 key interest rate, which influences borrowing costs across the economy, has been at its highest level in 23 years for about a year, after the central bank aggressively raised rates to bring down inflation. While the pace of price increases has slowed significantly in 2023, it hit a snag early this year that pushed back the timing of the first scheduled rate cut. Fed officials plan to cut interest rates only once this year, according to their latest economic projections in June, down from the three cuts they had forecast in March.
Inflation resumed its downward trend in the spring, but officials seem to agree, saying they need more evidence that inflation is actually moving toward its 2% target. In June, consumer prices did not increase on a monthly basis for the first time since November, according to the Fed’s preferred inflation gauge, the personal consumption expenditures price index. The annual inflation rate for personal consumption expenditures came in at 2.6% in June, down slightly from 2.7% in May.
“Inflation is now about 2.5%, so we’ve made significant progress in bringing it down,” New York Fed President John Williams said at an event in India last week. “But we still have a long way to go to reach our 2% target sustainably.”
But inflation isn’t the only thing the Fed is looking at to determine when to start cutting interest rates. The Fed is closely monitoring the U.S. labor market, which has shown signs of slowing, as U.S. consumers show signs of slowing after years of high inflation and sharply rising interest rates, according to the latest spending data and retail filings.
Here are the key takeaways from Powell’s hearing before the Senate Banking Committee.
The Fed’s top policymaker told senators that the U.S. labor market now looks like it did before the COVID-19 pandemic: “solid, but not overheated.” The U.S. labor market rebounded strongly from a brief pandemic-induced recession in 2020, and it has continued to grow since then. But it has softened a bit recently: The unemployment rate hit its highest level in more than two years last month, and new jobless claims have been rising in recent weeks.
“I worry that if the Fed waits too long to cut rates, it could reverse the progress we’ve made in creating good-paying jobs,” Sen. Sherrod Brown of Ohio, who chairs the Senate Banking Committee, said at the hearing.
The U.S. labor market remains a pillar of the broader economy, but it is no longer operating at the breakneck pace of a few years ago. The unemployment rate edged up to 4.1% in June, the highest rate since November 2021, even as employers continued to hire at a brisk pace. The gap between job openings and the number of unemployed people looking for work, a measure of labor market tightness, has narrowed significantly over the past year.
Powell said throughout the hearing that the Fed was acutely aware that it faced “double-edged risks”: a spike in inflation from the central bank cutting rates too early, and a sharp weakening of the labor market from the Fed cutting rates too late. Both risks would have consequences for Americans and for the U.S. economy as a whole.
The Fed is charged by Congress with stabilizing prices and maximizing employment, and it balances its focus on one or the other depending on the economic situation at the time. For a few years, the Fed focused more on the inflation side of its dual mandate, but that has changed recently.
“If we see the labor market weakening unexpectedly, that is, more than we’ve seen significantly and unexpectedly,” Powell said, “then we could react to that as well, because we have a dual mandate and we see the two mandates more balanced now than they were a year ago.”
The U.S. economic engine, consumer spending, is starting to show signs of weakness. Sales at U.S. retailers have consistently fallen short of expectations in recent months, and distributors have sounded the alarm that consumers across the board are looking for cheaper alternatives. Recent surveys of U.S. service businesses have shown that consumer demand has been tepid so far this summer, a sharp contrast to last year, when Americans went on a spending spree.
Taken together, recent economic data argue in favor of the Fed reducing borrowing costs.
The Fed chairman told lawmakers that a proposed banking regulation would likely be revised and reworked — a topic Republicans have repeatedly raised with Powell. At the same time, some Democrats have raised rules on Wall Street executive pay.
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. In the aftermath of the Great Recession, banking regulators from around the world met 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 these banking rules is known as Basel III Endgame, and it calls for increasing the amount of capital held by the largest banks to protect against risks. The Fed’s latest “stress test,” which is a simulation of how big banks would behave in tough economic conditions, showed that all 31 banks tested would survive and still be able to lend credit. But they took a bigger financial hit than they did last year. When the Basel III Endgame test was proposed last year, banking interest groups and lawmakers on both sides pushed back, arguing that requiring banks to bolster their capital beyond what is currently required would hurt their ability to lend.
Powell said Tuesday that a “strong view among board members is that we need to release a revised proposal for comment over a period of time.” It’s unclear what changes a new proposal would entail.
Sen. Elizabeth Warren of Massachusetts asked Powell about a long-delayed rule aimed at curbing reckless behavior on Wall Street related to executive incentive pay, known as Section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010. Several regulators, including the Fed, must first figure out how to implement the rule, but reaching consensus among them has typically been a challenge, especially given intense lobbying efforts.
“The Fed has refused to join other financial regulators in finalizing a rule implementing Section 956 as Congress has requested,” Warren said. She referred to a comment Powell has made in the past that he wanted to see evidence of the problem Section 956 would solve.
Powell said he “never said to trust banks to self-regulate.”