Federal Reserve's Powell says "more good data" could open door to interest rate cuts

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Federal Reserve Chair Jerome Powell said Tuesday that "more good data" could open the door to interest rate cuts, citing recent reports that show that the labor market and inflation are continuing to cool. The central bank left its benchmark interest rate unchanged at its June meeting, and penciled in only one rate cut in 2024 versus its previous forecast of three cuts this year, after digesting data showing inflation remains stubbornly high. Following a flurry of rate hikes, the Fed's federal fund rate since July of 2023 has remained in a range of 5.25% to 5.5% — the highest in 23 years. Speaking Tuesday morning at a Senate Banking Committee hearing, Powell stressed that the central bank wants to see further progress in bringing the annual inflation rate to about 2% before cutting rates, with the most recent consumer price index at 3.3%. But the chair also noted that the Fed is concerned with the risks of waiting too long to cut rates, noting that "elevated inflation is not the only risk we face." The next "likely direction seems to be .... that we loosen policy at the right moment," Powell said at the hearing, adding that he believed it would be unlikely for the Fed to increase rates. Recent economic indicators suggest "that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated," Powell added. The Fed chair addressed the Senate panel on the first of two days of semi-annual testimony to Congress. On Wednesday, he will testify to the House Financial Services Committee. Powell's comments suggest "a September interest rate cut remains very much in play," noted Capital Economics in a Tuesday research note. Recent economic data shows some signs of cooling. For instance, the jobless rate, while is still low, has increased slightly to 4.1% in June, while payroll job gains averaged about 222,000 per month in the first six months of 2024, he added. The jobs-to-workers gap has declined from a pandemic peak and now is at about its 2019 level, Powell noted. The next big piece of economic data the Fed will digest arrives on Thursday with the release of the June consumer price index. Economists expect that inflation rose at a 3.1% annual rate last month, according to financial data firm FactSet. "Further progress" on inflation From March 2022 to July 2023, the Fed raised its benchmark interest rate 11 times to a two-decade high of 5.3% in a bid to quash inflation, which peaked at 9.1% two years ago. Those hikes increased the cost of consumer borrowing by raising rates for 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 did not boost Fed officials' confidence that inflation was under control. "The most recent inflation readings, though, have shown some modest further progress," Powell told the Senate committee, "and more good data would strengthen our confidence that inflation is moving sustainably toward 2%." Gregory Daco, chief economist at the consulting firm EY, said he thought Powell's "greater focus on the two-sided risks to the outlook is welcome, albeit a little late." Daco added that he thinks the Fed ought to cut its benchmark rate at its July meeting. Otherwise, he suggested, businesses might soon step up layoffs as the economy slows. Yet Powell did not provide what Wall Street investors are watching for most closely: a clear indication of the Fed's timing for cutting interest rates. But his testimony will likely harden investors' and economists' expectations that the first reduction will come at the central bank's September meeting. An independent Fed In his testimony, Powell also underscored the Fed's status as an independent institution, which he said "is needed 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 pressures is necessary to enable them to take such steps. "One gets the idea that the Federal Reserve is laying down a marker ahead of the upcoming presidential election," said Joe Brusuelas, an economist at the tax advisory firm RSM. During his presidency, Donald Trump, in a highly unusual attack from a sitting president, repeatedly denounced Powell, whom he had nominated as Fed chair, for raising interest rates. Trump has already indicated that he wouldn't renominate Powell if he is elected president again. Asked about the importance of a central bank with the independence to set monetary policy, Powell replied, "It's actually essentially, literally essential. The good news is I think that is broadly understood on both sides of the aisle." He added, "We need to do our work in a way that's outside the political process."