Federal Reserve Chair Jerome Powell heads to Capitol Hill this week to deliver his twice-yearly report on the state of the economy. The back-to-back sessions will likely feature some feisty exchanges, but few details on when the central bank expects to lower interest rates.
“Chair Powell probably faces a tougher task than usual. Inflation has become a political issue and the election is approaching,” writes Jonathan Pingle, chief U.S. economist at UBS.
Though Pingle expects Powell will avoid disclosing any specifics during the hearings, Fed watchers will likely see him defend the central bank’s current stance on monetary policy, as well as policymakers’ data dependent approach.
Expect Powell to note it will likely be appropriate to begin easing monetary policy sometime later this year without delving into details, even if pressed. If Powell uses “soon” to describe the timing of potential rate cuts, Pingle says that would be notable.
Powell’s current views on the labor market will be of particular interest. The risk that employment could slow too much if the Fed keeps rates high has grown since his last appearance in front of Congress. Officials are weighing that risk against the potential for inflation to accelerate if they cut rates too soon.
Payroll gains have remained fairly robust, averaging 222,300 per month over the first half of the year, but there are signs the labor market is moderating from the very elevated levels of early 2022. Last month, the unemployment rate ticked up to 4.1%—at the same time the Labor Department issued significant downward revisions to April and May job gains and jobless claims continued to rise.
In a semiannual monetary policy report published Friday, Fed staff noted that, despite the uneven first-quarter results, inflation measured by the personal consumption expenditures price index has shown modest downward progress this year. Though at 2.6%, PCE inflation still remains above the Fed’s target as of May.
Powell noted at the European Central Bank Forum on Central Banking in Portugal last week that there had been a lot of progress in taming inflation in the U.S., though he reiterated that officials wanted to be “more confident that inflation is moving sustainably down” to the 2% target before starting to cut rates.
Yet the recent progress on inflation and the cooling labor market are giving rise to hopes an initial rate cut is just around the corner. The odds of a September rate cut rose to 71% as of Monday afternoon, up from a less than 50-50 probability last month, according to CME FedWatch tool.
If the PCE inflation reading in June is a good one, then “the appropriate conditions are unfolding for the Fed to begin reducing its very restrictive Fed funds rate by 25 basis points, likely starting in September,” writes Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the BlackRock global allocation investment team.
Powell’s Senate testimony will kick off at 10 a.m. Eastern on Tuesday.