Jerome Powell, Chairman of the U.S. Federal Reserve, during a hearing of the Senate Banking, Housing and Urban Affairs Committee in Washington, D.C., U.S., Tuesday, July 9, 2024.
Tierney L. Cross | Bloomberg | Getty Images
Federal Reserve Chairman Jerome Powell on Tuesday expressed concern that keeping interest rates too high for too long could put economic growth at risk.
In preparation for his two-day appearance before Congress this week, the central bank chief said the economy remains strong and so does the labor market, despite some recent slowdown. Powell pointed to some slowdown in inflation, which he said policymakers remain determined to bring down to their 2% target.
“At the same time, given the progress we have made in reducing inflation and cooling the labor market over the past two years, higher inflation is not the only risk we face,” he said in prepared remarks. “Reducing policy restrictions too late or too little could unduly weaken economic activity and employment.”
The comment coincides with the approaching one-year anniversary of the last time the Federal Open Market Committee raised benchmark interest rates.
The Federal Reserve's overnight borrowing rate is currently 5.25%-5.50%, its highest level in about 23 years and the result of 11 consecutive increases after inflation reached its highest level since the early 1980s.
Markets expect the Fed to begin cutting interest rates in September, with another quarter-point cut likely by the end of the year. However, FOMC members signaled only one cut at their June meeting.
“Boosting our confidence”
In recent days, Powell and his colleagues have indicated that inflation data has been somewhat encouraging after a surprise surge at the start of the year. Inflation, as measured by the Fed’s preferred personal consumption expenditures price index, was 2.6% in May after peaking above 7% in June 2022.
“After lacking progress toward our 2 percent inflation goal in the first part of this year, the latest monthly readings have shown more modest progress,” Powell said. “More good data should bolster our confidence that inflation is moving sustainably toward 2 percent.”
The statement comes as part of the semi-annual updates on monetary policy mandated by Congress. After making his remarks, Powell will face questioning from members of the Senate Banking Committee on Tuesday and then the House Financial Services Committee on Wednesday.
In the past, Powell has avoided making dramatic political statements while having to dodge politically charged questions from committee members. The questioning could prove controversial this year, given the tense state of Washington amid a volatile presidential campaign.
Several Democratic members of the committee urged Powell to cut interest rates soon.
“I fear that if the Fed waits too long to cut interest rates, it will undo the progress we have made in creating good-paying jobs,” Sen. Sherrod Brown (D-Ohio), the committee’s chairman, told Powell. “If unemployment rises, you must act now to protect American jobs. Workers have too much to lose if the Fed overshoots its inflation target and causes an entirely unnecessary recession.”
However, Powell stressed that the Fed is not political and does not take policy positions outside its own roles. In his prepared remarks, he stressed the importance of the “operational independence required” for the Fed to do its job.
His other comments focused squarely on the policy stance on the broader economy. Recent data showed unemployment rising and overall growth as measured by gross domestic product declining. 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 slowing GDP.
“Private domestic demand remains strong, with slower but still robust increases in consumer spending,” he added.
