Washington
CNN
—
Federal Reserve Chairman Jerome Powell said Tuesday that inflation has risen significantly since hitting a 40-year high two years ago, but noted that central bank officials want to see more progress before cutting interest rates, even as they are also keeping a close eye on the job market.
“I do not believe it would be appropriate to lower the target range for the federal funds rate until we have greater confidence that inflation is sustainably moving toward 2 percent,” Powell said in written testimony to lawmakers. During the hearing, Powell did not explicitly say a rate cut this year was still possible or indicate when the first cut might occur, a departure from previous comments.
“But the latest inflation readings point to some further progress and further better data will strengthen our confidence that inflation is sustainably heading towards 2 percent,” he added.
Powell appeared before the Senate Banking Committee on Tuesday to deliver the Fed's semi-annual monetary policy report to Congress. He is scheduled to appear before the House Financial Services Committee on Wednesday to deliver 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 stuck at a 23-year high for about a year after the central bank aggressively raised rates to tame inflation.The pace of price growth slowed dramatically in 2023, but problems arose earlier this year that pushed back the timing of the first rate cut.Fed officials now expect just one rate cut this year, down from the three they predicted in March, according to their latest economic forecast in June.
Inflation started trending downward again in the spring, but officials seem unified in saying they need more evidence that inflation is really heading toward their 2% target. The Fed's favorite inflation gauge, the personal consumption expenditures price index, showed that consumer prices did not rise on a monthly basis in June for the first time since November. Annual PCE inflation was 2.6% in June, down slightly from 2.7% in May.
“Inflation is now around 2.5 percent and 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 ways to go to achieve our 2 percent target sustainably.”
But inflation isn't the only thing the Fed is watching as it considers when to start cutting rates. The central bank is also watching the U.S.'s long-strong job market show signs of cooling. The latest spending data and comments from retailers show that U.S. consumers are showing signs of cutting back on spending after years of high inflation and skyrocketing interest rates.
Here are some key takeaways from Chairman Powell's hearing before the Senate Banking Committee:
The Fed chief told senators that the U.S. job market is now similar to how it was before the coronavirus pandemic, “robust but not overheated.” The U.S. job market recovered strongly after a brief pandemic-induced recession in 2020 and has continued to expand since then. But it has eased a bit recently. The unemployment rate rose to its highest level in more than two years last month, and new claims for unemployment benefits have been trending up in recent weeks.
“I am concerned that if the Fed waits too long to lower interest rates, it could undo the progress it has made in creating good-paying jobs,” Sen. Sherrod Brown of Ohio, chairman of the Senate Banking Committee, said at the hearing.
The U.S. job market remains a strong pillar of the overall economy, but it's not growing as fast as it did a few years ago. The unemployment rate rose slightly to 4.1% in June, the highest level since November 2021, but employers continue to actively hire. The gap between the number of job openings and the number of unemployed people looking for work, an indicator of labor market tightness, has narrowed significantly over the past year.
Throughout the hearing, Chairman Powell said he was well aware that the Fed was dealing with a “two-sided risk”: the risk that inflation would rise again if the central bank cut rates too soon, and the risk that the labor market would weaken sharply if the Fed waited too long to cut rates. Either risk would have consequences for Americans and the U.S. economy as a whole.
The Federal Reserve is tasked by Congress with both price stability and maximum employment, adjusting its emphasis to one goal or the other depending on the state of the economy at the time. In recent years, the Fed has emphasized the inflation aspect of its dual mandate, but that has recently been shifting.
“If we see that the labor market weakens unexpectedly — unexpectedly and to a greater extent than we've seen historically — then we're well placed to respond to that, because we have a dual mission and we believe those missions are better balanced today than they were a year ago,” Powell said.
The powerhouse of the U.S. economy, consumer spending, is starting to show some cracks. U.S. retail sales have consistently fallen short of expectations in recent months, and retailers are sounding the alarm as shoppers of all income levels trade up for cheaper goods. A recent survey of U.S. service providers found that consumer demand has been sluggish so far this summer, in contrast to the spending spree Americans saw last year.
Taken together, the recent string of economic data strengthens the case for the Fed to begin lowering borrowing costs.
The Fed chairman told lawmakers that a proposed set of banking regulations would probably be revised and reproposed — a topic Republicans have repeatedly raised with Powell — while some Democrats have spoken out about rules on compensation for Wall Street executives.
The Federal Reserve Board, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, is one of the main banking regulators in the United States. In the aftermath of the Great Recession, banking regulators from around the world met in Basel, Switzerland to develop international standards for banks to strengthen financial stability. These rules are still in the process of being adopted and implemented.
The final phase of these banking regulations, called the Basel III endgame, requires large banks to increase the amount of capital they hold to protect themselves against risks. The Fed's latest so-called “stress tests,” which simulated how large banks would fare in a tough economic climate, showed that all 31 banks tested survived and could continue to lend, but suffered a bigger economic blow than last year. When the Basel III endgame was proposed last year, bank interest groups and lawmakers from both parties opposed it, arguing that banks' ability to lend would be hurt if they had to hold more capital than they are currently required to.
“Governing Board members feel strongly that proposed amendments should be made public for a period of time to solicit comment,” Powell said Tuesday. It's unclear what specific changes the new proposal would make.
Sen. Elizabeth Warren, D-Massachusetts, grilled Powell about long-delayed rules aimed at curbing reckless behavior on Wall Street related to executive incentive compensation, known as Section 956 of the Dodd-Frank Act passed in 2010. Several regulators, including the Fed, must first consider how to implement the rules, but reaching agreement among them is typically difficult, especially given the intensity of lobbying.
“The Federal Reserve has refused to join other financial regulators in finalizing rules implementing Section 956 as directed by Congress,” Warren said, pointing to past comments by Powell that he wants to see evidence of the problems that Section 956 solves.
“I never said I trusted banks to regulate themselves,” Powell said.
