WASHINGTON — The Federal Reserve is facing a cooling labor market In addition to persistently high prices, Chair Jerome Powell said in written testimony Tuesday that this marks a shift from the Fed’s emphasis on inflation over the past two years, signaling the Fed is moving closer to a rate cut.
The Fed has made “significant progress” toward its goal of worst inflation peak in forty years, Powell said in testimony before the Senate Banking Committee.
“Inflation has fallen significantly over the past two years,” he added, although it is still above the central bank’s 2% target.
Powell pointedly noted that “high inflation is not the only risk we face.” Cutting interest rates “too late or too little could unnecessarily weaken economic activity and employment,” he said.
The Fed chairman addresses the Senate panel on the first of two days of semiannual testimony before Congress. On Wednesday, he is scheduled to testify before the House Financial Services Committee.
From March 2022 to July 2023, the Fed raised its benchmark interest rate 11 times to a two-decade high of 5.3% to combat inflation, which peaked at 9.1% two years ago. Those hikes raised the cost of consumer borrowing by raising interest 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.
Powell and other Fed policymakers have repeatedly stressed in the past that given the strength of the economy and low unemployment, they could be patient in cutting rates and wait until inflation was truly under control.
But on Tuesday, Powell said the labor market has “cooled, but is still strong.” And he added that economic growth has moderated after a strong expansion in the second half of last year. Last week, the government reported that hiring remained solid in June, although the unemployment rate rose for the third straight month to 4.1%.
Powell’s prepared testimony Tuesday did not provide what Wall Street investors are most looking for: a clear indication of when the Fed might deliver its first rate cut. But the testimony is likely to reinforce expectations among investors and economists that the first cut will come at the central bank’s September meeting.
Last week, Powell said at a monetary policy conference in Portugal that there had been “quite a bit of progress on the inflation front,” something Fed officials have said they need to see consistently before they feel confident enough to cut rates. In May, year-on-year inflation fell to only 2.6%not far above the Fed’s 2% target by the benchmark and down sharply from the peak of 7.1% two years ago.
On Thursday, the government will publish the latest status of the better-known consumer price indexThe CPI is expected to show an annual increase of just 3.1% in June, down from 3.3% in May.
Such signs of cooling inflation, coupled with evidence that the economy and labor market are slowing, have intensified calls for the Fed to cut its benchmark interest rate. Several Democratic senators, including Elizabeth Warren of Massachusetts, a senior member of the Senate Banking Committee, have written letters to Powell urging him to begin cutting rates.
According to CME FedWatch, investors are putting the chance of a Fed rate cut in September at 76%, up from 50-50 a month ago.
Powell’s comments last week and minutes of the June Fed meeting Released last week have increased that likelihood. The Fed chairman noted that inflation is easing again after data for the first three months of this year suggested inflation could be rising. And the minutes showed that most Fed officials believe the economy is cooling, making a rate cut more likely.