Federal Reserve Chairman Jerome Powell on Wednesday reinforced the message that the central bank is increasingly focused on a slowing labor market rather than just curbing inflation, a shift that suggests the central bank may soon begin cutting interest rates.
“We are not just an inflation-targeting central bank,” Powell told the House Financial Services Committee on the second day of two days of semiannual congressional testimony. “We still have an employment mandate.” Powell’s remarks came days after the unemployment rate hit 4.1%, the highest level in more than three years and a sign that the United States may be on the brink of recession.
Speaking before the Senate Banking Committee on Tuesday, Powell said the Fed had made “considerable progress” on its goal to defeat the worst inflation surge in four decades, noting that cutting interest rates “too late or too little could unduly weaken economic activity.” and employment.
Congress gave the Federal Reserve a dual mission: to maintain price stability and promote maximum employment.
“We’ve had to focus on the inflation task for a long time,” Powell said on Wednesday. Inflation hit a four-year high in mid-2022 as the economy emerged from the pandemic recession. The Fed responded by raising its benchmark interest rate 11 times in 2022 and 2023.
Employment is still growing – but at a slower pace
The U.S. economy and job market continue to grow, running counter to widespread predictions that a sharp rise in borrowing costs caused by the Federal Reserve’s interest rate hikes will lead to a recession. Still, growth has subsided this year. U.S. employers added an average of 177,000 positions per month from April to June, the slowest three-month hiring pace since January 2021.
Powell told a House committee on Wednesday that the Fed may not wait until inflation reaches its 2% target before cutting interest rates to avoid damaging the economy.
The market was pleased with the Fed’s more dovish shift, with the S&P 500 up 0.7% as of 1:30 pm ET and on track to hit its 37th all-time high this year. The Dow Jones Industrial Average rose about 0.5% and the Nasdaq rose 0.9% to hit record highs.
Most economists say they expect the Fed’s first rate cut to occur in September. Powell declined this week to say when he expected to cut interest rates for the first time.
Under questioning from several Republican lawmakers, Powell said the Fed and other financial regulators would overhaul a 2023 proposal known as the “Basel III endgame” that would increase the amount banks have to pay to deal with potential losses. The amount of capital required to be held.
Big banks have actively resisted tougher requirements that emerged after the 2007-2008 financial crisis. They warned that tighter rules would force them to cut lending to consumers and businesses, potentially jeopardizing the economy.
Powell said the three major U.S. bank regulators – the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency – are close to agreeing on a new version, which will be open to public comment.
