Federal Reserve Chair Jerome Powell informed Congress that the U.S. economy is no longer overheated, with the job market having cooled down to pre-pandemic levels. This shift suggests a growing case for potential interest rate cuts.
Speaking to the Senate Banking Committee, Powell acknowledged that the Federal Reserve now faces dual risks, balancing inflation with other economic factors. He emphasized that the labor market is back in balance and refrained from giving specific guidance on the timing of future interest rate changes. Instead, he highlighted the importance of data-driven decisions.
With the November 5 presidential election approaching and only two scheduled Fed meetings before then, Powell faced questions from both political parties. Democrats expressed concerns about delaying rate cuts, while Republicans warned of the ongoing impact of inflation exceeding the Fed’s 2% target.
Senator Kevin Cramer emphasized that lowering rates before the election could be perceived negatively, reinforcing support for Fed independence. Powell consistently stressed the importance of the Fed’s autonomy and his commitment to data-based decision-making.
Analysts suggest Powell’s remarks indicate a possible rate cut in September, as the Fed balances risks within its mandate. Recent improvements in inflation data have increased confidence that price pressures will continue to ease.
Despite the Fed maintaining its policy rate between 5.25% and 5.5% since July 2023, Powell’s comments hinted at a shift toward looser monetary policy. He highlighted the need to avoid overly tight monetary policy that could hinder economic growth, which remains robust with strong private demand and improved supply conditions.
Investor confidence in a September rate cut grew following Powell’s testimony, with a nearly 70% probability assigned to such a move. Although the Fed’s June meeting projected only a single quarter-point rate cut by year-end, weaker-than-expected inflation data since then has bolstered the case for an earlier cut.
Powell’s appearance in the Senate precedes a House hearing, with discussions likely to focus on housing costs and proposed bank regulation changes. The Fed’s report to Congress also noted a decline in housing market pressures, contributing to a shift in focus from inflation to recession risks.
