Washington — The Fed book faces a cooling process market in addition to persistently high prices, Chairman Jerome Powell said in testimony to Congress on Tuesday, a turnaround evident from the Fed’s two-year single-minded struggle against inflation. Which means it is moving closer to reducing interest rates.
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 late or too little could weaken economic activity and employment,” he said.
The Fed Chairman addressed a Senate panel on the first of 2 days of semi-annual testimony to Congress. On Wednesday, he is scheduled to 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. They increase the price of consumer borrowing by increasing fees for mortgages, auto loans and bank cards, among alternative methods of borrowing. Its purpose was to slow borrowing and spending and destabilize the financial system.
On Tuesday, Powell said the inflation report covering the first three months of this year did not boost Fed officials’ confidence that inflation is coming under control.
“However, the most recent inflation readings have shown some modest progress,” 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.
However, on Tuesday, Powell noted that the process market “has cooled significantly.” And he said the economy’s growth has slowed after a strong expansion in the second half of last year. Last week, the government reported that hiring remained solid in June. The unemployment rate rose for the third consecutive month to 4.1%.
The Fed chairman expressed surprise that the job market “is not a source of broad inflationary pressure for the economy.”
Powell did not address what many Wall Boulevard buyers are watching: no clear indication of the timing of when the Fed might make its first rate cut. However his testimony will likely strengthen buyers’ and economists’ expectations 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 refine a proposal starting next year that would significantly increase the amount of capital that banks would need to store to offset potential losses. The most important American banks strongly objected to this proposal. He argued that tighter capital requirements would have forced them to issue loans to customers and companies.
US financial institutions ran TV ads against the proposal, dubbed the “Basel III endgame”, reflecting the outcome of global negotiations on financial supervision that emerged from the 2007–2008 financial crisis. Powell said the three main financial regulators – the Fed, the Federal Vault Insurance Corporation and the Office of the Comptroller of the Currency – were close to agreeing on a new proposal that would be subject to public comment.
In his testimony, Powell also underlined the Fed’s status as a separate institution, which he said “needs to take a long-term view” on interest rate policy and inflation. Raising borrowing prices in an effort to gradually increase prices is politically unpopular, and economists have long thought it is important to insulate central banks from political pressures 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 highly unusual attack by a sitting president, has 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.
At the end of the month, Powell said at an economic policy conference in Portugal that “considerable progress has been made on inflation”, with Fed officials saying they wanted to see it consistently before giving assurances they would reduce rates by a sufficient amount. . , In May, year-on-year inflation fell to just 2.6%, according to the Fed’s most popular measure, not a notch above its 2% target and sharply up from a high of 7.1% two years ago. ,
On Thursday, the government will look at the untouched reading of the famous consumer price index. The CPI is estimated to grow only 3.1% year-on-year in June, down from 3.3% in May.
Such signs of easing inflation, combined with evidence that the financial system and process markets are slowing down, have intensified calls for the Fed to lower its benchmark rate. 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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