US Federal Reserve Chairman Jerome Powell made the remarks during a hearing of the Senate Committee on Banking, Housing and Urban Affairs in Washington, DC, US, Tuesday, July 9, 2024.
Tierney L. Cross | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell expressed concern Tuesday that keeping interest rates too high for too long could jeopardize economic growth.
As he prepares to appear before Congress for two days this week, central bank Governor Jerome Powell said the economy is holding up well, as is the labor market, despite a recent downturn. He noted that inflation has eased slightly and said policymakers are determined to bring it down to their 2 percent target.
“At the same time, higher inflation is not the only risk we face, given the progress made over the past two years in both containing inflation and cooling the labor market,” he said in prepared remarks. “Reducing policy restraints too late or not enough could weaken economic activity and employment too much.”
The commentary comes as the Federal Open Market Committee approaches the one-year anniversary of the last time it raised interest rates.
The Federal Reserve’s overnight borrowing rate is currently in the 5.25% to 5.50% range, the highest level in nearly 23 years and the result of 11 consecutive rate hikes after inflation hit its highest level since the early 1980s.
Markets expect the Fed to begin cutting rates in September, with another 0.25 percentage point cut by the end of the year, but the June FOMC meeting suggested only one rate cut.
“Boost your confidence”
Recently, Powell and his colleagues have suggested that inflation data is somewhat brighter after an unexpected surge earlier in the year. Inflation, as measured by the Fed’s key personal consumption expenditures price index, peaked above 7% in June 2022 before settling at 2.6% in May.
“After a lack of progress toward our 2 percent inflation goal earlier this year, recent monthly data indicate modest progress,” Powell said. “As we receive further, better data, our confidence will increase that inflation is sustainably moving toward 2 percent.”
The statement was part of a congressionally-mandated semi-annual monetary policy update. Powell’s remarks are due to be followed by questioning from members of the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.
Powell has so far avoided dramatic policy announcements, dodging political questions from policymakers, and this year’s Q&A sessions could be contentious with tensions in Washington amid a volatile presidential election.
Several Democratic committee members urged Powell to cut rates sooner.
“If the Fed waits too long to cut rates, it risks undoing the progress it has made toward creating good-paying jobs,” Sen. Sherrod Brown (D-Ohio), the committee’s chairman, told Powell. “With unemployment trending higher, it must act now to protect American jobs. Workers have too much to lose if the Fed cuts rates too quickly.” [its] It will send inflation off target and cause a totally unnecessary recession.”
But Chairman Powell stressed that the Fed is not political and will not engage in taking policy positions outside of its role. In his prepared remarks, the chairman stressed the importance of the Fed’s “necessary operational independence” to carry out its mandate.
His other remarks focused on policy’s stance on the economy as a whole. Recent data shows the unemployment rate is creeping up and overall growth as measured by gross domestic product is slowing. Both the manufacturing and services sectors reported contractions in June.
But Powell said the data showed that “the U.S. economy continues to expand at a solid pace” despite the slowdown in GDP.
“However, private domestic demand remains strong and consumer spending is growing slowly but steadily,” he said.
