– Reaffirms Price Stability Pledge But Warns Can’t Wait Too Long To Cut Rates
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell appeared to show a greater willingness to consider easing monetary policy Tuesday, while continuing to express a strong commitment to getting inflation down to the Fed’s 2% target.
Powell, in the first of two days of testimony on the Fed’s semi-annual Monetary Policy Report to Congress, said that recent economic data require the Fed’s policy making Federal Open Market Committee to pay greater attention to potential economic weakness – not just to lowering inflation.
Powell told the Senate Banking Committee that he and his colleagues still want to gain “greater confidence” that inflation is headed “sustainably” down to 2% before lowering short-term interest rates.
But he didn’t stop there, going on to caution more strongly than he has in the past against the risks of waiting too long to lower rates.
“(I) 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,” he told the Senators.
Like other Fed policymakers who have lately put increasing emphasis on downside risks to the “maximum employment” side of the central bank’s “dual mandate,” Powell warned that “reducing policy restraint too late or too little could unduly weaken economic activity and employment.” Powell’s remarks come in wake of another set of mixed employment numbers that tilted toward softness. The Labor Department reported that non-farm payrolls grew a better than expected 206,000 in June, but prior months job gains were revised down by a cumulative 111,000. Much of the remaining job gains were in government. The ADP employment report showed private-sector job growth slowed for the third straight month in June.
Average hourly earnings also slowed to a 3.9% year-over-year pace.
What’s more, the unemployment rate ticked up another tenth last month to 4.1%, its highest level since October 2021, after having gone as low as 3.4% in January 2023. Some economists tout increased joblessness as an early recession indicator.
Softer labor market conditions have coincided with mounting signs of slowing economic growth, the latest being the June drop in the Institute for Supply Management’s non-manufacturing survey, which showed a contraction in service sector activity for the second time in three months..
Meanwhile, Fed officials are taking cheer that disinflation seems to have resumed after stalling out in the first quarter. Although inflation remains well above the Fed’s 2% target, the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, was flat in May and rose 2.6% from a year earlier. The core PCE was up a tenth, but it too was 2.6% higher than a year earlier.
The differently weighted Consumer Price Index also moderated in May, but ran hotter than the PCE, rising 3.3% overall and 3.4% over the last 12 months. The June CPI report, due Thursday morning, is being anxiously awaited.
In toto, the latest data have heightened speculation that the FOMC will lower the federal funds rate before long.
At its June 11-12 meeting, the FOMC left that key money market rate in a 5.25-5.50% target range, where it’s been since the Committee last raised it last July 26. In so doing, the FOMC reiterated that it ”does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.”
Powell echoed that language in his Monetary Policy Report testimony.
At the June meeting, FOMC participants projected just one 25 basis point rate cut in its policy rate this year to a median 5.1% — down from the three cuts projected in March and from the six or more cuts financial markets were hoping for prior to a series of discouraging first quarter inflation reports.
Recent signs of slower economic activity and softer labor market conditions, together with more encouraging inflation data have renewed hope on Wall Street that the FOMC will start cutting its policy rate – not at its July 30-31 meeting, but perhaps as early as its Sept. 17-18 meeting, and perhaps multiple times beyond that.
Against the backdrop of cooling economic activity and moderating inflation, Powell did not explicitly tip his hand on when or by how much rates might be lowered, but seemed to give more hope for monetary easing than he has in the past.
Once again, he echoed the FOMC statement in saying he and his colleagues need to gain more “confidence” that inflation is headed “sustainably” toward 2%, but he expressed encouragement about recent “further progress” against inflation. And he seemed to focus more on potential downside risks to the economy.
Seemingly utilizing subtle rhetorical shifts and changes of emphasis, Powell suggested that the FOMC’s “risk management” approach to monetary policy is undergoing a recalibration. No longer is the focus solely on attaining “price stability” as defined by the 2% flexible inflation target, now that price increases have come down from their 9.1% peak of two years ago.
“The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%,” he testified, echoing the June FOMC policy statement.
“Incoming data for the first quarter of this year did not support such greater confidence,” he added.
However. the Fed chief went on to suggest that since the first quarter there is greater reason for “confidence” on getting inflation down to target.
“The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent,” he said.
Powell suggested that, after holding the funds rate steady for seven straight meetings, the FOMC could decide to change direction at one of its upcoming meetings, but made clear it will be proceeding cautiously and patiently and employing data dependence.
“We continue to make decisions meeting by meeting,” he said., “We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation.”
“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,” he went on. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”
Though he seemed to open the door wider to rate cuts, it is questionable whether Powell was signaling that the FOMC is gearing up to cut rates as soon or as much as some have been hoping for.
While intimating a greater willingness to consider rate cuts if recent trends toward moderation of inflation and labor market tightness persist, Powell’s testimony continued to reflect some hesitancy to make monetary policy significantly less restrictive, amid lingering doubts among some of his colleagues about whether policy is sufficiently restrictive.
Powell’s testimony clearly opens the door to one or more rate hikes this year. At the same time, it is questionable whether Powell was signaling that the FOMC is gearing up to cut rates as soon or as much as some have been hoping for.
While intimating a greater willingness to consider rate cuts if recent trends toward moderation of inflation and labor market tightness persist, Powell’s testimony continued to reflect some hesitancy to make monetary policy significantly less restrictive, amid lingering doubts among some of his colleagues about whether policy is sufficiently restrictive.
His assessment of economic and labor market conditions were measured. He pointed to signs of cooling, but betrayed no sense of alarm.
“Recent indicators suggest that the U.S. economy continues to expand at a solid pace,” he said. “Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year”
“Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending,” he continued. “We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.”
In the past, Powell has said that an “unexpected weakening” of the labor market would require the Fed to “respond.” His testimony did not reflect concern that recent cooling of job markets were either “unexpected” or unduly weak.
“In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated,” he said. “The unemployment rate has moved higher but was still at a low level of 4.1 percent in June.”
Powell further noted that payroll job gains averaged 222,000 jobs per month in the first half of the year, and he said “strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in labor force participation among individuals aged 25 to 54 and a strong pace of immigration.”
“As a result, the jobs-to-workers gap is well down from its peak and now stands just a bit above its 2019 level,” he said, adding that “nominal wage growth has eased over the past year.”
On the inflation front, Powell observed that it “has eased notably over the past couple of years but remains above the Committee’s longer-run goal of 2%.”
He added a note of encouragement, however. “After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” he said.
What’s more, he added, “longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.”