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Fed needs ‘more good data’ to feel comfortable with rate cuts: Powell
Federal Reserve Chairman Jay Powell indicated the central bank was getting closer to feeling comfortable with interest rate cuts, saying he was encouraged by evidence of cooler inflation and that more “positive data” would help the Fed get to where it wants to be.
Inflation numbers “showed some modest progress” after some warmer readings in the first quarter, “and further positive data would strengthen our confidence that inflation is moving sustainably toward 2%,” he said in testimony before U.S. lawmakers on Tuesday.
Powell appears before the Senate Banking Committee today and before the House Financial Services Committee tomorrow as part of his mandatory semiannual hearing before Congress.
Federal Reserve Board Chairman Jerome Powell speaks during a news conference at the Federal Reserve in Washington on June 12. (AP Photo/Susan Walsh) (ASSOCIATED PRESS)
He dropped other hints Tuesday that the environment for rate cuts is approaching, citing a jobs market that is also slowing.
“The latest labor market data sends a very 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.”
His appearance before Senate lawmakers marked the second time in the past week that Powell has offered optimism about the inflation picture. Speaking about Portugal on Tuesday, he noted that the last two inflation readings for April and May “suggest that we are returning to a disinflationary path.”
The next reading of inflation as measured by the Consumer Price Index will be released on Thursday.
Inflation is not expected to worsen, but it is not expected to decline either. Based on core CPI — which excludes volatile food and energy prices that the Fed cannot control — inflation is expected to hold steady at 3.4% in June, down from the same level in May.
Powell noted in his prepared testimony that the Fed will continue to make policy decisions on a meeting-by-meeting basis. He reiterated that cutting rates too quickly could reverse progress in reducing inflation, while keeping rates high 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 banking regulators last summer that would require the largest U.S. banks to maintain larger buffers against losses. Banks pushed back aggressively against the proposal.
Powell said banking 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 separating the central bank from politics.
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In his testimony, he stressed that Congress has entrusted the Fed with the operational independence it needs to take a “long-term perspective” in pursuing its dual mandate of maximum employment and stable prices.
Some Fed watchers had called for a cut in September after the release of a June unemployment report that showed signs of a slightly cooling labor market, with the unemployment rate rising one-tenth of a percent for the second straight month to 4.1%.
While the unemployment rate of 4.1% is still historically low, it is up from 3.4% at the beginning of last year.
Powell, in his testimony, characterized the labor market as “strong but not overheated” and said the increase in the unemployment rate for a second straight month in June is “still at a low level of 4.1%.
Powell appeared to attribute the rise in the unemployment rate to an increase in the supply of workers, with more people entering the job market, rather than a sign of deterioration.
Powell has said in the past that a few percentage point rise in the unemployment rate above 4% is unlikely to trigger the central bank to cut rates; instead, a broad weakening in the labor market is more likely. If the labor market goes from strong to weak quickly, it will be difficult for the Fed to contain the damage.
The Fed raised its inflation outlook at its latest policy meeting earlier this month to 2.8% from 2.6% and reduced its projection for one rate cut this year from three.
Investors are betting there is a greater than 70% chance the Fed will initiate a rate cut in September.
Powell declined on Tuesday to be more specific about when the cuts might begin.
“I will not send any signal today about the timing of any future actions,” he said.
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