Jerome Powell keeps options open on rate-cut timing

Federal Reserve Chair Jerome Powell.
Federal Reserve Chair Jerome Powell.

Summary

Federal Reserve Chair Jerome Powell suggested the central bank was focusing more on when to cut interest rates now that inflation has resumed a decline.

Federal Reserve Chair Jerome Powell suggested the central bank was focusing greater attention on when to cut interest rates now that inflation has resumed a decline and the labor market is showing signs of cooling off.

“Elevated inflation is not the only risk we face," Powell said in remarks prepared for delivery Tuesday morning before the Senate Banking Committee.

Powell said the economy had made “considerable progress" toward lower inflation with a job market that looks as it did before the pandemic—“strong, but not overheated." But he did little to shape expectations around when the central bank might start to lower interest rates. “We continue to make decisions meeting by meeting," he said.

Economic projections released last month showed most Fed officials expect to cut interest rates once or twice this year if inflation slows and growth is solid but unspectacular. Their next meeting is July 30-31. Markets are focused on whether officials at that meeting might provide stronger hints that they could cut rates at their subsequent gathering in September.

Fed officials are trying to balance two risks. One is that they move too slowly to ease policy and the economy crumples under the weight of higher interest rates, sending unemployment up sharply. The other is that lower rates ignite economic activity and allow inflation to settle out above their goal.

Inflation fell to 2.6% in May, according to the Fed’s preferred gauge, down from 4% one year earlier but still above the Fed’s 2% target.

The economy has continued to add more than 200,000 jobs a month, on average, this year. But the unemployment rate has inched up—to 4.1% in June from 3.7% in December—as an increase in the number of people looking for work has led to somewhat longer spells of joblessness.

The Fed raised rates at the fastest pace in 40 years in 2022 and 2023 to combat inflation that also rose to a four-decade high. Officials have held their benchmark rate in a range between 5.25% and 5.5% since last July.

Officials were surprised in the second half of last year by how rapidly price growth slowed despite strong spending and hiring, leading them to shift their attention away from how high to raise rates and toward how long to wait before cutting them. When Powell last appeared before lawmakers in early March, he hinted that the Fed would be able to cut rates by June. Inflation turned around after that, derailing any such plan.

More recent inflation readings “have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%," Powell said Tuesday.

The inflation whiplash has left the Fed in an awkward holding pattern, where policymakers are looking for either several more months of convincingly benign inflation readings or evidence of a meaningful slowdown in hiring and economic activity before lowering rates.

Write to Nick Timiraos at Nick.Timiraos@wsj.com

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