Chair of the Federal Reserve Jerome Powell said on Wednesday that the Fed is likely to start reducing interest rates soon because it is becoming more aware of the sluggish labor market in addition to controlling inflation.
Powell told the House Financial Services Committee on the second of two days of semi-annual testimony to Congress, “We’re not just an inflation-targeting central bank.” “There is an employment mandate as well.”
Powell said that the Fed had made “considerable progress” in containing the worst inflation spike in four decades during his Tuesday speech to the Senate Banking Committee. Powell also mentioned that reducing rates “too late or too little could unduly weaken economic activity and employment.”
The Fed is tasked by Congress with two goals: maintaining price stability and maximizing employment.
Powell said on Wednesday that “we’ve had to focus on the inflation mandate for a long time.” Midway through 2022, as the economy surged out of the pandemic slump, inflation reached a four-decade high. In response, the Fed increased the benchmark rate eleven times in 2022 and 2023. Since then, inflation has dropped from a high of 9.1% to 3.3%.
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Despite popular expectations that the recession would be brought on by considerably higher borrowing costs as a consequence of the Fed’s rate rises, the U.S. economy and job market have continued to thrive. Growth has still slowed down this year. The average monthly hiring rate for U.S. firms for the first three months of June was 177,000, the lowest level since January 2021.
Powell said the House subcommittee on Wednesday that the Fed most likely wouldn’t hold off on raising rates until inflation hit its 2% objective in order to prevent hurting the economy.
According to most analysts, September will mark the Fed’s first rate reduction. Powell has refrained from stating when he plans to release the first cut this week.
