Federal Reserve Chairman Jerome Powell on Tuesday expressed concern concerning the potential dangers of preserving curiosity rates excessive for too lengthy, which could negatively affect economic growth.
Current Assessment of the Economy
In preparation for his two-day look on Capitol Hill, Powell pressured that the economic system and labor market stay strong, although they’ve proven indicators of cooling. Powell pointed to a decline in inflation and reaffirmed policymakers’ dedication to attaining the two% goal.
“At the same time, given the progress in reducing inflation and the cooling of the labor market over the past two years, elevated inflation is not the only risk we face,” Powell stated. “Reducing policy restraint too late or insufficiently could significantly weaken economic activity and employment.”
Interest Rates and Market Expectations
This remark comes near the one-year anniversary of the Federal Open Market Committee (FOMC) final elevating benchmark curiosity rates. The Fed’s present fee is in a variety of 5.25% to five.50%, the very best degree in 23 years, the results of 11 consecutive will increase after inflation hit its highest degree for the reason that Eighties.
Markets are anticipating the Fed will start slicing rates in September, with one other quarter-point discount attainable earlier than the tip of the 12 months. However, FOMC members in June indicated just one attainable discount.
Progress in Reducing Inflation
Powell and different Fed members have famous that latest inflation information are encouraging after an sudden spike earlier within the 12 months. Inflation as measured by the Fed’s most popular private consumption expenditures value index was 2.6% in May, after having topped 7% in June 2022.
“Following a lack of progress toward our 2% inflation objective earlier this year, the most recent monthly readings have shown modest additional progress,” Powell stated. “Further positive data would strengthen our confidence that inflation is moving sustainably toward 2%.”
Semiannual Monetary Policy Updates
The remarks are a part of the semiannual financial coverage updates required by Congress. After delivering his remarks, Powell will take questions from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
Powell has beforehand averted making important coverage bulletins whereas fielding politically charged questions from committee members. This 12 months, the questioning could be extra intense given the tense presidential marketing campaign in Washington.
Political Pressures
Several Democratic committee members have urged Powell to chop rates quickly. Sen. Sherrod Brown (D-Ohio), the committee chairman, expressed concern: “I am concerned that if the Fed waits too long to cut rates, it could undo progress in creating good-paying jobs. If unemployment rises, it must act immediately to protect American jobs. Workers have much to lose if the Fed overshoots its inflation target and triggers an unnecessary recession.”
Powell has emphasised that the Fed isn’t political and doesn’t take sides exterior its purview. In his remarks, he pressured the significance of “the operational independence necessary” for the Fed to satisfy its mission.
Recent Economic Data
Powell additionally addressed the connection of coverage to the broader economic system. Recent information reveals an increase within the unemployment fee and a slowdown in GDP growth. Both the manufacturing and providers sectors reported being in contraction throughout June.
Powell concluded by saying that regardless of the slowdown in GDP, “The U.S. economy continues to expand at a solid pace.” He famous that “private domestic demand remains robust, with slower but still solid increases in consumer spending.”
