Fed Chair Jerome Powell signaled a potential shift in monetary policy on Tuesday, suggesting that “more good data” would strengthen the case for interest rate cuts. While inflation remains above the Fed’s 2% target, recent improvements have bolstered confidence that price pressures are easing.
“After a lack of progress toward our 2% inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell said in remarks delivered to the Senate Banking Committee. “More good data would strengthen our confidence that inflation is moving sustainably toward 2%.”
However, Powell also expressed concern about the potential risks to the job market and economy if interest rates remain too high for too long. “In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he said. “Leaving policy too tight for too long, could unduly weaken economic activity and employment.”
Powell’s comments have bolstered expectations for a potential rate cut in September, with investors assigning a 70% probability. The Fed will receive consumer price information for June on Thursday, which will be a key factor in shaping future decisions.
The congressional hearings are likely to be intense, with the Fed’s decision on rate cuts becoming a potential political issue ahead of the November presidential election.
The Fed’s June 11-12 meeting saw a median projection of 19 officials for a single quarter-point rate cut by the end of the year, but subsequent weaker-than-expected inflation data has shifted the outlook. The consumer price index remained flat in May, and analysts anticipate another weak reading when new data is released on Thursday.
This latest statement from Powell suggests that the Fed is cautiously optimistic about the economy and inflation, but remains vigilant about potential risks. The upcoming economic data releases will be closely scrutinized as they will likely determine the future trajectory of interest rates.