During his testimony in Congress this week, Federal Reserve Chairman Jerome Powell indicated that interest rate cuts could be on the horizon.
In the Monetary Policy Report given to the Senate Committee on Banking, Housing and Urban Affairs, Powell pointed out recent progress on cooling inflation with the restrictive rates policy. But after the most recent jobs report, which showed a slowing in the jobs market, he expressed growing concern about holding rates at the current level too long.
“We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation,” Powell said. “At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.”
Unemployment rose slightly to 4.1 percent in June, according to data from the Bureau of Labor Statistics. The rate was 3.6 percent in June 2023. The economy added 206,000 jobs in June, which was 14,000 below the monthly average for the past year.
The Federal Open Market Committee has held the federal target rate at 5.25 to 5.5 percent for the past seven meetings, since July 2023. That followed the Fed raising rates by 525 basis points from early 2022 until last summer. The aggressive approach reined in inflation which peaked above 9 percent.
“Inflation has eased notably over the past couple of years but remains above the Committee’s longer-run goal of 2 percent,” Powell said. “Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in May. Core PCE prices, which exclude the volatile food and energy categories, also increased 2.6 percent. After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress.”
At the June meeting, members of the FOMC predicted rates to drop to 5.1 percent by the end of year, 4.1 percent by the end of 2025 and 3.1 percent in 2026.
The next FOMC meeting is July 30-31.
