WASHINGTON (Reuters) – The U.S. economy is no longer overheating, with the jobs market having cooled significantly compared to the post-COVID period, Fed Chairman Jerome Powell said on Tuesday, suggesting the case for cutting interest rates was growing stronger.
“We are well aware that we now face double-sided risks and that we can no longer focus solely on inflation, which nevertheless remains above the central bank’s 2% target,” he said during a hearing before the US Senate Banking Committee, adding that the labour market appeared to “have returned to equilibrium”.
Jerome Powell’s comments appeared to signal growing confidence that inflation will return to target, a condition for easing monetary policy as the Fed maintains the federal funds rate range between 5.25% and 5.5% since July 2023.
The Fed chairman contrasted the lack of progress on inflation in the first months of the year with the recent improvement that has helped boost the central bank’s confidence that price pressures will continue to ease.
“After a lack of progress toward our 2 percent inflation target at the start of the year, the most recent monthly data have shown further modest progress,” Powell said.
“Further good data would strengthen our confidence that inflation is sustainably approaching 2%.”
Consumer price figures for June will be released on Thursday.
A jobs report released Friday showed 206,000 jobs were created in June, but the monthly trend slowed and the unemployment rate rose to 4.1 percent.
The Fed chairman called the figure “still a low level,” while noting that “given the progress made in both reducing inflation and cooling the labor market over the past two years, elevated inflation is not the only risk the central bank faces.”
Too much restrictive policy for too long “could unduly weaken economic activity and employment,” he said, citing the risks of undermining a period of economic growth that he said “remains solid” with “robust” private demand, an improvement in general supply conditions and a “recovery in residential investment.”
“He’s starting to look at a rate cut,” said Brian Jacobsen, an analyst at Annex Wealth Management. Fed officials “see it as a risk not to cut rates early enough. Previously, they were focused exclusively on inflation.”
Jerome Powell will speak again on Wednesday, this time before the House Financial Affairs Committee.
(Reporting by Howard Schneider; by Diana Mandiá, edited by Blandine Hénault)
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