Powell Says Labor Market 'Strong, Not Overheated': Fed Chair Awaits 'Right Moment' To Cut Interest Rates

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Federal Reserve Chairman Jerome Powell reiterated Tuesday that a policy rate cut would not be “appropriate” until the Fed gains greater confidence that inflation is heading sustainably toward 2%, he said during his semiannual testimony before the Senate Banking Committee.

Reducing policy restraint too soon or too much could stall or even reverse the progress made on inflation, Powell told the Senate committee.

“We need to see more good inflation data,” Powell said, adding that the timing for interest rate cuts relies on the data. He also reiterated his June statement that an unexpected weakening in the labor market could lead to lower interest rates.

Powell: Economy No Longer Overheated

The U.S. economy has made significant strides toward the 2% inflation goal, the Federal Reserve chair said. Recent monthly readings indicate modest further progress, and more positive data would strengthen confidence that inflation is moving sustainably toward the target, he said.

“This is no longer an overheated economy,” Powell said. “This is an economy that is more or less back by most measures to where it was before the pandemic.”

The recent decline in inflation is due to improving supply factors, such as the resolution of pandemic-related disruptions and cooling demand from a more balanced labor market, he said.

“Labor market indicators suggest conditions have returned to their pre-pandemic state: strong, but not overheated. The latest labor market data indicate that conditions have cooled considerably compared to two years ago.”

While progress has been made in lowering inflation and cooling the labor market, Powell said “elevated inflation is not the only risk we face.”

Reducing policy restraint too late or too little could unduly weaken economic activity and employment, he said.

A rate increase doesn’t seem likely, Powell said, adding that the option is not off the table.

“The likely direction does seem to be in as we make more progress in inflation and as the labor market remains strong, we begin to loosen policy at the right moment,” Powell said.

On the housing market front, Powell addressed significant housing issues in the country, noting that tighter monetary policy has affected interest-sensitive spending, particularly in the housing sector.

The best way to help the housing market is to achieve a sustainable 2% inflation rate, allowing rates to come down and the market to return to its pre-pandemic normal, he said.

“I’m aware that housing is in short supply and a critical need for many,” Powell said, adding that fiscal policy, rather than monetary policy, should address this issue.

Market Reactions To Powell

The market took Powell’s remarks as slightly more hawkish than expected, as the U.S. dollar surged against other major currencies and Treasury yields moved higher.

The yield on the 10-year Treasury note inched 3 basis points higher to 4.31%, pushing bond-related assets lower. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) fell 0.7%, on track to snap four straight days of gains.

Stocks had mixed reactions to Powell’s remarks, with the S&P 500, as tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), broadly holding session gains, up 0.2%. The Nasdaq 100, as tracked by the Invesco QQQ Trust (NASDAQ:QQQ), slightly trimmed gains.

Within sectors, energy, financials, utilities, and health care stocks rose following Powell’s speech, while technology sectors declined.

The Financial Select Sector SPDR Fund (NYSE:XLF) was up 0.5% for the day, outperforming all other S&P 500 sectors.

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Illustration created using artificial intelligence via MidJourney.