Powell told the Senate Banking Committee that the Fed has made “considerable progress” toward its goal of defeating the worst inflation surge in four decades.
“Inflation has declined significantly over the past two years,” he said, although it still remains above the central bank’s 2% target.
Powell clearly stated that “increased inflation is not the only risk we face.” Cutting interest rates “too high or too low may unnecessarily weaken financial functions and businesses.”
The Fed Chairman addressed a Senate panel on the first of 2 days of semi-annual testimony to Congress. On Wednesday, he will testify before the Space Monetary Products and Services Committee.
From March 2022 to July 2023, the Fed raised its benchmark interest rate 11 times to fight inflation, to a two-decade high of 5.3%, from a peak of 9.1% two years ago. Increases the cost of consumer borrowing by increasing fees for alternative methods of borrowing as well as mortgages, auto loans, and bank cards. Its purpose was to slow borrowing and spending and destabilize the economic system.
On Tuesday, Powell said inflation reports for the first three months of this year did not boost Fed officials’ confidence that inflation was coming under control.
“However, the latest inflation readings have proven some excess travel,” Powell told the Senate committee, “and more good data will strengthen our confidence that inflation is steadily moving toward 2%.”
Gregory Daco, chief economist at consulting firm EY, said he believed Powell’s “focus more on the two-sided risks of the outlook is welcome, even if a little late.” Daco said he believes the Fed should cut the benchmark rate at its July meeting. Otherwise, he suggested, businesses could soon increase layoffs as the economy slows.
In the past, Powell and other Fed policymakers have repeatedly emphasized that the strength of the economy and the low unemployment rate mean they can be patient about cutting rates and waiting to make sure the rate cuts continue. We can say that inflation is indeed under control.
But on Tuesday, Powell said the job market “has cooled significantly.” And he said the economy’s growth has slowed after a strong surge in the second half of last year. At the latest, the federal government reported that hiring remains bullish as the unemployment rate rose for the third consecutive time to 4.1% in June.
The Fed chairman expressed surprise, saying market activity “is not a source of system-wide inflationary pressures”.
Powell missed what Wall Side Road buyers have been watching for: no clear indication of the timing of when the Fed might make its first rate cut. His testimony, however, will dash buyers’ and economists’ hopes that primary relief will come at the central bank’s September meeting.
“It doesn’t look like the next policy step will be a rate increase,” Powell said, responding to a question from Rhode Island Democrat Senator Jack Reed. “As we make more progress on inflation … we start easing policy at the right time.”
Powell also told senators that the Fed and other financial regulators will reintroduce a proposal next year that would significantly increase the amount of capital that banks would need to reserve to offset potential losses. The most important American banks strongly objected to this proposal. He argued that tighter capital requirements would have put pressure on them to ease lending to shopkeepers and companies.
US financial institutions ran TV ads in opposition to the proposal, dubbed the “Basel III endgame”, reflecting the outcome of world talks on financial supervision that emerged from the 2007–2008 financial disaster. Powell said the three major financial regulators – the Fed, the Federal Bank Insurance Corp. and the Office of the Comptroller of the Currency – were involved in agreeing to an untested proposal that could be the subject of society comment.
In his testimony, Powell also underlined the Fed’s position as a separate institution, saying it “needs to take a long-term perspective” on interest rate coverage and inflation. Raising borrowing prices to try to slow price growth is often politically unpopular, and economists have long thought that insulating central banks from political pressures is necessary to enable them to take such steps.
“One gets the idea that the Federal Reserve is preparing a marker ahead of the upcoming presidential election,” said Joe Brusuelas, an economist at tax advisory firm RSM.
Throughout his presidency, Donald Trump, in a very strange attack from a sitting president, repeatedly criticized Powell, whom he nominated as Fed chairman, for raising interest rates. Trump has already indicated that he will not re-nominate Powell if he is elected president again.
The final pace, Powell said at a financial policy conference in Portugal that “considerable progress has been made on inflation”, something that Fed officials have said they want to see consistently before they feel confident enough to short rates. Do it. In May, year-on-year inflation fell to just 2.6%, in line with the Fed’s favorite measure, which is now nowhere above its 2% target and I’m increasingly sick of the high of 7.1%. Two years ago.
On Thursday, the federal government will release the latest reading of the famous Consumer Price Index. The CPI in June is projected to increase by only 3.1% year-on-year, down from 3.3% in May.
Such indicators of softening inflation, as well as evidence that the economic system and activity markets are slowing down, have increased the need for the Fed to lower the benchmark price. Several Democratic senators, including Senate Banking Committee Chairman Sherrod Brown of Ohio and Elizabeth Warren of Massachusetts, have written to Powell urging him to start lowering rates.
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