Federal Reserve Could Ease Policy Before Inflation Reaches 2 Percent, Powell Says

Chair of the Federal Reserve Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve’s Semi-Annual Monetary Policy Report at the U.S. Capitol in Washington on July 10, 2024. Bonnie Cash/Getty Images

The U.S. central bank won’t wait until inflation returns to 2 percent before easing monetary policy, Federal Reserve Chair Jerome Powell told lawmakers in his second day of testimony on Capitol Hill on July 10.

Appearing before the House Financial Services Committee, Mr. Powell confirmed that policymakers don’t have a “particular number” that inflation needs to touch before cutting interest rates.

“We’ve said that you don’t want to wait until inflation gets all the way down to 2 percent, because inflation has a certain momentum,” Mr. Powell said.

“You wouldn’t wait that long. If you waited that long, you probably waited too long, because inflation will be moving downward.”

Instead, according to the Fed chief, officials are assessing the totality of the data and determining if inflation is heading toward the institution’s 2 percent target.

“The question is, are we sufficiently confident that it is moving sustainably down to 2 percent, and I’m not prepared to say that yet,” he stated.

While the Fed will assess various measurements, policymakers will concentrate on the personal consumption expenditures (PCE) price index.

The PCE maintains a broader range of goods and services and weighs categories differently. The Fed has preferred this inflation gauge for the past 25 years.

According to the Bureau of Economic Analysis, in May, the PCE increased by 2.6 percent, compared with May 2023. Core PCE, which strips the volatile food and energy components, was also up by 2.6 percent.

The updated June Summary of Economic Projections suggests that Fed officials don’t expect PCE and core PCE to touch 2 percent until 2026.

At the post-Federal Open Market Committee meeting news conference, Mr. Powell told reporters that he does not want to see inflation touch 2 percent just once.

“We’re not looking for inflation to tap the 2 percent base once. We’re looking for it to settle out over time at 2 percent,” he said earlier this year.

Key Takeaways From Senate Hearing

In his first day of testimony before the Senate Banking Committee, Mr. Powell asserted that keeping interest rates too high for too long threatens economic growth prospects.

At the same time, cutting rates prematurely could risk reviving inflation threats.

“We do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent,” Mr. Powell said in prepared remarks.

“The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.

The benchmark federal funds rate is at a 23-year high of between 5.25 percent and 5.5 percent.

According to the Fed’s Summary of Economic Projections, monetary policymakers anticipate only one quarter-point rate reduction this year, lowering the median policy rate to 5.1 percent by the end of 2024.

On the labor front, Mr. Powell told lawmakers that the country’s job market is comparable to where it was before the COVID-19 pandemic.

“In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated,” he said.

The unemployment rate ticked up to 4.1 percent last month, and employment gains averaged 222,000 per month in the first half of 2024.

But Democrat lawmakers, including Sen. Sherrod Brown (D-Ohio), warned that waiting too long to lower interest rates “could undo the progress we’ve made in creating good-paying jobs.”

Sen. Sherrod Brown (D-Ohio), speaking during a March 2022 Senate Banking Committee hearing, is expected to face a stiff GOP challenge in his 2024 quest for a fourth term in increasingly red Ohio. Tom Williams, Pool via AP

While the Fed is seeking more good inflation data before lowering rates, Mr. Powell conceded that the central bank could respond if there were sudden weakness in the labor market.

“If we see that the labor market were weakening unexpectedly, which is to say more than what we’ve seen in a material way unexpectedly, then we could also respond to that because we have a dual mandate and we now see the two mandates more in balance than they were a year ago,” the Fed Chair stated.

Banking regulation, from the Basel III endgame proposal to executive compensation rules, was also a focal point for both sides of the aisle.

Republican senators suggested that Basel III, which imposes stringent capital requirements on financial institutions with more than $100 billion in assets, is another example of overregulating because it would eliminate capital from traveling through the economy.

“Basel III capital requirements are like taking your star quarterback and telling him to sit on the sidelines because he just might get injured during the season,” Sen. Tim Scott (R-S.C.) said. “It’s just plain ridiculous.”

Sen. Elizabeth Warren (D-Mass.) criticized the head of the Federal Reserve over a long-delayed measure—Section 956 of the Dodd–Frank Wall Street Reform and Consumer Protection Act—that limits Wall Street’s incentive-based compensation for executives.

“The Fed has refused to join the other financial regulators in finalizing a rule implementing Section 956 as Congress directed,” Ms. Warren said in a tense exchange with the Fed chairman.

Next Stop: Inflation

After wrapping up his appearance on Capitol Hill, Mr. Powell and his monetary policy colleagues will examine the consumer price index (CPI) report, scheduled to be released on July 11.

The annual inflation rate is expected to ease to 3.1 percent, according to the Cleveland Fed’s Inflation Nowcasting model. Core CPI, which omits the energy and food sectors, is anticipated to remain at 3.4 percent.

Data for producer prices—a gauge of prices paid for goods and services by businesses—is scheduled be published on July 12.

The consensus estimate suggests that the producer price index (PPI) rose by 0.1 percent in June and core PPI jumped by 0.2 percent.

Federal Open Market Committee policymakers will convene their next two-day policy meeting on July 30.

While there is a slight chance of a quarter-point rate reduction later this month, the futures market is penciling in a rate cut in September.