Federal Reserve Chair Jay Powell indicated the central bank is inching closer to feeling comfortable about interest rate cuts, saying that he was encouraged by evidence of cooler inflation and that more “good data” would help get the Fed to where it wants to be.
The inflation numbers “have shown some modest further progress” after some hotter readings in the first quarter, “and more good data would strengthen our confidence that inflation is moving sustainably toward 2%,” he said in testimony before US lawmakers.
Powell spoke Tuesday before the Senate Banking Committee and tomorrow will testify before the House Financial Services Committee as part of his semiannual required Congressional appearances.
He dropped other hints Tuesday that the environment for rate cuts is approaching, citing a jobs market that is also slowing down and attracting more attention from policymakers.
“The most recent labor market data do send a pretty clear signal that labor market conditions have cooled considerably compared to where they were two years ago,” he said. “This is no longer an overheated economy.”
The risks of meeting the Fed’s two mandates — maximum employment and stable prices — are “coming much more into balance,” he added.
His appearance before Senate lawmakers marked the second time in the last week Powell offered optimism about the inflation picture. Last Tuesday, while speaking in Portugal, he noted that the last two inflation readings from April and May “do suggest that we are getting back on a disinflationary path.”
The next reading on inflation as measured by the Consumer Price Index is due out Thursday.
It isn’t expected to show inflation getting worse, but it isn’t expected to drop, either. Based on “core” CPI — which excludes volatile food and energy prices the Fed can’t control — inflation is expected to hold steady at 3.4% in June from the same level in May.
Powell noted in his prepared testimony the Fed will continue to make decisions on monetary policy meeting by meeting. He reiterated that lowering rates too quickly could reverse progress on bringing inflation down, while keeping rates elevated for too long could weaken the economy and the job market.
Some Democrats pressed Powell on whether rates would be cut soon, while Republicans pressed Powell on a set of bank capital rules proposed by bank regulators last summer that would require the biggest US banks to hold greater buffers against losses. Banks have pushed back aggressively against the proposal.
Powell said banks regulators have been discussing changes to the proposal and are close to agreeing on those changes. A final determination could be ready early next year.
Powell was also asked about the Fed’s independence and took time to reinforce the importance of the central bank’s separation from political influence.
“I think it’s essential,” and “I think that’s pretty broadly understood” by members of both parties on Capitol Hill, he said.
Some Fed watchers have called for a cut in September following the release of an unemployment report for June that showed signs of a gently cooling labor market, with the unemployment rate ticking up a tenth of a percent for the second month in a row to 4.1%.
While the unemployment rate of 4.1% is still historically low, it’s up from 3.4% early last year.
Powell seemed to attribute the increase in the unemployment rate to an increase in supply of workers, with more people joining the job market, rather than a sign of deterioration.
Powell has said in the past that a couple ticks up in the unemployment rate above 4% aren’t likely to be a trigger for the central bank to cut rates; a broad weakening in the job market is more likely to trigger an easing of policy.
The Fed raised its outlook for inflation at its last policy meeting earlier this month to 2.8% from 2.6% previously and trimmed its projection to one rate cut this year from three.
Investors are betting on a better than 70% chance the Fed will initiate a rate cut for September.
Powell declined Tuesday to be more specific about when any cuts could begin.
“Today I am not going to be sending any signals about the timing of any future actions,” he said.
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