In remarks signaling growing confidence that inflation will return to the Fed’s target, a condition for monetary policy easing, Powell contrasted the lack of progress on the inflation front in the first few months of the year with more recent improvements that have helped boost the Fed’s confidence that price pressures will continue to decline.
The chairman also noted that the Fed is now concerned about the risks to the job market and the economy if interest rates remain high for a long period of time.
“While we saw little progress toward our 2 percent inflation goal early this year, recent monthly data suggest modest progress,” Powell said in a speech to the Senate Banking Committee. “As we receive further, better data, our confidence will increase that inflation is sustainably moving toward 2 percent.”
The Fed will receive June consumer price information on Thursday.
Friday’s jobs report showed payrolls rose by 206,000 in June, but the monthly rate of increase slowed and the unemployment rate rose to 4.1%. Powell called that “still low,” but noted that “higher inflation is not the only risk we face, given progress over the past two years in both containing inflation and cooling the labor market.” Powell said keeping policy tight for an extended period “could overly weaken economic activity and employment,” undermining a period of economic growth that has seen “robust” private demand, generally improving supply conditions and “recovering housing investment.”
Powell’s comments could bolster expectations for a change in policy statement to be issued after the Fed’s July 30-31 meeting that would at least open the door to a September rate cut that investors now see as about a 70% chance, barring an unexpected spike in upcoming inflation measures.
At the Fed’s June 11-12 meeting, the average forecast of 19 officials was for just one quarter-point rate cut by the end of the year, but inflation measures since then have been weaker than expected.
The consumer price index did not rise at all in May, and analysts expect new data released on Thursday to show another weak reading.
Powell’s testimony is the latest in a series of semi-annual hearings on monetary policy that will be followed by questions from senators. He is scheduled to appear before the House Financial Services Committee on Wednesday at 10 a.m. EDT (14:00 GMT).
Powell typically faces questioning on a wide range of topics during congressional hearings, but with the presidential election in November, the Fed’s decision on whether to continue cutting interest rates or delay it is likely to be part of the discussion, and the scrutiny could be even more intense.
The inflation target is set based on the personal consumption expenditures price index, which as of May stood at 2.6% higher than the previous year.
That’s down from pandemic-era peaks, but the inflation shock remains a powerful political issue.
In a report to Congress released Friday ahead of Powell’s testimony, the Fed said it had good reason to believe price pressures, particularly in the housing market, a major driver of recent sustained inflation, were easing.
Combined with concerns about the labor market, “the Fed will likely be more worried about recession risks than robust inflation,” economists at Pantheon Macroeconomics wrote after the last jobs report was released.
