Federal Reserve Chairman Jerome Powell reinforced the message Wednesday that the Fed is increasingly focusing on the labor market slowdown and not just on controlling inflation, a shift that signals it is likely to start cutting interest rates soon.
“We’re not just an inflation-targeting central bank,” Powell told the House Financial Services Committee during the second of two days of semiannual testimony before Congress. “We also have an employment mandate.” Powell made his remarks days after Unemployment rate reached 4.1%the highest level in more than three years and an indication that the United States may be on the brink of a recession.
Tuesday, when Powell addresses Senate Banking CommitteeHe suggested the Fed had made “considerable progress” toward its goal of defeating the worst inflation spike for four decades and stressed that a rate cut “too late or too little could unduly weaken economic activity and employment.”
Congress gave the Fed a dual mandate: to maintain price stability and promote maximum employment.
“For a long time,” Powell said Wednesday, “we’ve had to focus on the inflation mandate.” As the economy emerged from the pandemic recession, inflation hit a four-decade high in mid-2022. The Fed responded by raising its benchmark rate 11 times in 2022 and 2023. Inflation has since fallen from its peak of 9.1% to 3.3%.
Jobs continue to be created, but at a slower pace
The U.S. economy and labor market have continued to grow, defying widespread predictions that much higher borrowing costs resulting from the Fed’s rate hikes would trigger a recession. Yet growth has weakened this year. From April through June, U.S. employers added an average of 177,000 jobs per monththe lowest three-month hiring rate since January 2021.
Powell told the House panel Wednesday that to avoid harming the economy, the Fed likely would not wait for inflation to reach its 2% target before starting to cut rates.
Markets welcomed the Fed’s more dovish turn, with the S&P 500 up 0.7% as of 1:30 p.m. ET, on track to set its 37th all-time high this year. Dow Jones Industrial Average rose about 0.5%, and the Nasdaq The composite index added 0.9% to its own record.
Most economists expect the Fed’s first rate cut to come in September. This week, Powell declined to say when he envisions that first cut.
Questioned by several Republican lawmakers, Powell said the Fed and other financial regulators would review a 2023 proposal, known as “Basel III Final,” that would increase the amount of capital banks are required to hold against potential losses.
Big banks have fought vigorously against the tougher requirements that came after the 2007-08 financial crisis. They have warned that the tougher rules would force them to cut back on lending to consumers and businesses, potentially jeopardizing the economy.
Powell said the three major U.S. banking regulators — the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency — were close to reaching agreement on a new version that would be submitted for public comment.
