Federal Reserve Chairman Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve’s “Semiannual Report on Monetary Policy” on Capitol Hill in Washington, U.S., March 6, 2024.
Bonnie Cash | Reuters
Federal Reserve Chairman Jerome Powell on Tuesday expressed concern that keeping interest rates too high for too long could jeopardize economic growth.
Setting the stage for a two-day appearance on Capitol Hill this week, the central bank leader said the economy remains strong and so does the labor market, despite the recent cooling. Powell cited some easing in inflation, which he said policymakers remain committed to lowering their 2 percent target.
“At the same time, in light of the progress made in both 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 restraint too slowly or too little could unduly weaken economic activity and employment.”
The comment coincides with the one-year anniversary of the last time the Federal Open Market Committee raised benchmark interest rates.
The Fed’s overnight lending rate is currently at a furious 5.25%-5.50%, the highest level in 23 years and the product of 11 consecutive hikes after inflation hit its highest level since the early 1980s.
Markets expect the Fed to begin cutting interest rates in September and likely follow up with another percentage point cut by the end of the year. FOMC members at their June meeting, however, indicated only one cut.
“Boost our confidence”
In recent days, Powell and his colleagues have pointed this out Inflation data was somewhat encouraging after a surprise jump to start the year. Inflation, as judged by the Fed’s preferred personal consumption expenditure price index, was at 2.6% in May, after peaking above 7% in June 2022.
“After a lack of progress towards our 2% inflation target earlier this year, the latest monthly readings showed modest further progress,” Powell said. “More good data would strengthen our belief that inflation is moving steadily towards 2 percent.”
The statement is part of the biannual monetary policy updates mandated by Congress. After delivering the remarks, Powell will face questions from members of the Senate Banking Committee on Tuesday and then the House Financial Services Committee on Wednesday.
In previous appearances, Powell has avoided making dramatic policy announcements while having to dodge politically charged questions from committee members. The questioning could become contentious this year as Washington is on edge amid a volatile presidential campaign.
However, Powell stressed that the Fed is not political and does not engage in taking policy sides outside of its own roles. In his prepared remarks, he stressed the importance of the “functional independence needed” for the Fed to do its job.
The rest of his remarks focused precisely on the stance of politics in relation to the wider economy. Recent data has shown that the unemployment rate is rising and broad-based growth, as measured by gross domestic product, is slowing. Both the manufacturing and services sectors reported contraction in June.
But Powell said the data showed “the U.S. economy continues to expand at a steady pace” despite the slowdown in GDP.
“Private domestic demand remains strong, however, with slower but steady increases in consumer spending,” he said.