Federal Reserve Chairman Powell Says ‘More Good Data’ Could Pave the Way for Rate Cuts

Federal Reserve Chairman Jerome Powell said Tuesday that “more good data” could open the door to interest rate cuts, citing recent reports showing the labor market and inflation continue to cool.

The central bank left its benchmark interest rate unchanged unchanged at its June meetingThe Fed has scheduled just one rate cut in 2024, down from three this year, after seeing data showing that inflation remains stubbornly high. After a series of rate hikes, the Fed’s federal funds rate has remained in a range of 5.25% to 5.5% since July 2023, the highest level in 23 years.

In a hearing before the Senate Banking Committee Tuesday morning, Powell stressed that the central bank wants to see further progress in bringing the annual inflation rate down to about 2% before cutting rates, with the most recent consumer price index at 3.3%. But the chairman also noted that the Fed is concerned about the risks of waiting too long to cut rates, noting that “high inflation is not the only risk we face.”

“The next ‘likely direction seems to be … that we ease policy at the right time,'” Powell said at the hearing, adding that he thought the Fed was unlikely to raise rates.

Recent economic indicators suggest that “conditions have returned to about the same level as on the eve of the pandemic: strong, but not overheated,” Powell added.

The Fed chairman addressed the Senate committee on the first of two days of semiannual testimony before Congress. On Wednesday, he will testify before the House Financial Services Committee.

Powell’s comments suggest that “a September interest rate cut remains very much in the cards,” Capital Economics noted in a research note Tuesday.

Recent economic data shows some signs of slowing. For example, the unemployment rate, while still low, edged up to 4.1% in June, while payroll job creation averaged 222,000 per month in the first six months of 2024, he added. The gap between the number of jobs and the number of workers has narrowed since the peak of the pandemic and is now roughly where it was in 2019, Powell noted.

The next big piece of economic data the Fed will have to digest will be released Thursday with the release of the June consumer price index. Economists expect inflation to have risen at an annual rate of 3.1% last month, according to financial data firm FactSet.

“New progress” on inflation

Between March 2022 and July 2023, the Fed raised its benchmark interest rate 11 times to 5.3%, its highest level in two decades, in an effort to curb inflation, which peaked at 9.1% two years ago. Those hikes raised the cost of consumer borrowing by raising rates on mortgages, auto loans and credit cards, among other forms of borrowing. The goal was to slow borrowing and spending and cool the economy.

On Tuesday, Powell noted that inflation reports covering the first three months of this year have not bolstered Fed officials’ confidence that inflation is under control.

“The most recent inflation data, however, have shown some modest progress,” Powell told the Senate committee, “and more positive data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Gregory Daco, chief economist at consulting firm EY, said Powell’s “increased focus on bilateral risks to the outlook is welcome, if somewhat belated.” He said the Fed is likely to cut its benchmark rate at its July meeting. Otherwise, he suggested, companies could soon ramp up layoffs as the economy slows.

But Powell did not provide what Wall Street investors are most eagerly awaiting: a clear indication of the Fed’s timetable for cutting interest rates. But his testimony is likely to reinforce expectations among investors and economists that the first cut will come at the central bank’s September meeting.

An independent Fed

In his testimony, Powell also emphasized the Fed’s status as an independent institution, which he said “is necessary to take a longer-term perspective” on interest rate policy and inflation. Raising borrowing costs to try to slow price increases is often politically unpopular, and economists have long believed that insulating central banks from political pressure is necessary to allow them to take such actions.

“It feels like the Federal Reserve is laying down markers ahead of the next presidential election,” said Joe Brusuelas, an economist at tax consulting firm RSM.

During his presidency, Donald Trump, in a highly unusual attack by a sitting president, repeatedly denounced Powell, whom he had nominated to head the Fed, for raising interest rates. Trump has already indicated that he would not reappoint Powell if re-elected chairman.

Asked about the importance of a central bank with the independence to set monetary policy, Powell said: “It’s actually fundamentally, literally essential. The good news is that I think that’s widely understood on both sides of the political spectrum.”

He added: “We have to do our work outside the political process.”