Top NewsUS Federal Reserve Chairman Jay Powell hails 'substantial progress' in tackling inflation

US Federal Reserve Chairman Jay Powell hails ‘substantial progress’ in tackling inflation

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US Federal Reserve Chairman Jay Powell said the central bank had made “substantial progress” in tackling inflation, but sought “more positive data” before cutting interest rates from 23-year highs.

In written testimony to the U.S. Congress released on Tuesday, Powell expressed optimism that the U.S. economy is returning to a better balance as the central bank tries to drive inflation back to its 2 percent target.

The latest inflation reports — one of which showed the Fed’s preferred rate easing to 2.6 percent in May — were encouraging and showed “modest improvement,” Powell said. But “more good data will strengthen our belief that inflation is moving steadily towards 2 percent”.

“Over the past two years, the economy has made substantial progress” toward the central bank’s inflation target, he said, adding that labor market conditions “have cooled while remaining strong.”

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Powell’s comments to the Senate Finance Committee underscored the Fed’s delicate balancing act as it debates when to cut its benchmark interest rate from 5.25 percent to 5.5 percent — a move it has been conducting since last July.

Cutting rates too quickly could thwart plans to control inflation. Keeping them high for too long would push more Americans out of work than necessary.

Powell addressed the trade exchange in his opening remarks, warning that a policy misstep could halt or reverse the recent uptick in inflation. However, “high inflation is not the only risk we face,” he added, citing concerns that keeping borrowing costs too high for too long could “wrongly” damage the economy.

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“We are well aware that we have bilateral risks right now,” he said later after being pressed by Sherrod Brown, the Democratic chairman of the Senate Finance Committee, not to hurt American jobs.

Powell said policy decisions would be made “by meeting,” although he hinted that the Fed’s next move would be a rate cut rather than a hike.

“Possible direction” means that the bank will “begin[s] “We need to ease policy at the right time” if inflation continues to fall and the job market is strong, the Fed chief said in response to questions from Senator Jack Reed of Rhode Island.

Officials are on edge after inflation picked up earlier this year, undermining expectations that the central bank would begin cutting rates before the summer. This has left policymakers eager for more sources of inflation before cutting borrowing costs.

However, recent signs of cooling in the labor market have reinforced expectations that borrowing costs will ease after the summer. The unemployment rate is now at 4.1 percent, the last recorded level in November 2021. Powell said on Tuesday that these conditions point to a “strong, but not overheated” labor market.

Officials recently stressed — minutes from the most recent June meeting — that sudden weakness in the labor market could push the central bank to lower rates.

Traders do not widely expect the central bank to cut borrowing costs when policymakers meet later this month, but are betting the cut will be bigger in September. As of June, officials themselves were predicting one interest rate cut this year, although a majority supported further action.

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The September meeting marks the Fed’s last meeting before the presidential election in November, after which the Fed will meet twice this year. Inflation and borrowing costs are among voters’ top issues weighing on President Joe Biden’s approval ratings.

Powell also faced questions about the Fed’s proposed changes to bank capital rules, as Wall Street and Republican lawmakers became increasingly active.

Given the possibility of “material” changes in the initial parameters, the chairman indicated that the central bank would accept new ideas in the revised proposal.

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