In comments that appeared to show increasing faith that inflation will return to the Fed’s target, a requirement for easing monetary policy, Powell compared the lack of progress on that front in the first months of the year to recent improvement that has helped build the Fed’s confidence that price pressures will continue to diminish.
As well, the chair noted, the Fed is now also concerned about risks to the job market and economy should rates remain too high for too long.
“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,” Powell said in remarks to be delivered to the Senate Banking Committee. “More good data would strengthen our confidence that inflation is moving sustainably toward 2%.”
The Fed receives consumer price information for the month of June on Thursday.
A jobs report on Friday showed a still-solid 206,000 jobs added in June, but with a slowing monthly trend and a rising unemployment rate now at 4.1%. Powell called that a “still low level,” but also noted that “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.” Leaving policy too tight for too long, “could unduly weaken economic activity and employment,” Powell said, undermining a period of economic growth that he said “remains solid” with “robust” private demand, improved overall supply conditions, and a “a pickup in residential investment.”
Powell’s comments may firm expectations for changes to the policy statement to be released after the Fed’s July 30-31 meeting that at least open the door to a September rate cut now given a roughly 70% probability by investors – barring a surprise jump in coming inflation readings.
At the Fed’s June 11-12 meeting the median projection of 19 officials was for just a single quarter-point rate cut by the end of the year, but since then inflation data has come in weaker than expected.
The consumer price index did not rise at all in May, and analysts anticipate another weak reading when new data is released on Thursday.
Powell’s testimony is his latest in a semiannual round of hearings on monetary policy, with questions from Senators to follow his remarks. He will appear before the House Financial Services Committee on Wednesday at 10 a.m. EDT (1400 GMT).
The congressional hearings also typically see Powell questioned on a broad array of topics, and that grilling could be more intense ahead of a November presidential election in which the Fed’s decision to either move forward with or postpone rate cuts is likely to become part of the debate.
The inflation target is set in reference to the Personal Consumption Expenditures price index, which as of May was increasing at a 2.6% year-over-year rate.
That is down from its pandemic-era peak, but the inflation shock remains a potent political debating point.
In a report to Congress released on Friday ahead of Powell’s testimony, the Fed noted that there was good reason to believe that price pressures, particularly in the housing market, a significant contributor to inflation’s recent persistence, were in decline.
Combined with concerns about the job market, that should “leave the Fed fretting more about the risk of recession than of sticky inflation,” economists at Pantheon Macroeconomics wrote after the last jobs report.
