On day one of Federal Reserve Chairman Jerome Powell’s Semiannual Monetary Policy Report to Congress, he spoke about the progress of taming inflation. His testimony on Tuesday was before the Senate; on Wednesday, he will testify before the House.
His testimony to the Committee on Banking, Housing, and Urban Affairs was a timely update in a changing economic landscape. The main topics included the Fed’s mandate of maximum employment and price stability and the policy implications of new data points in these two areas of concern.
While Powell’s testimony did not include a cry of “mission accomplished,” some sections can be seen as good news for business owners, investors, and workers affected by rising prices.
The Current Economic Landscape
Powell’s testimony began by outlining the current economic situation. He noted that the U.S. economy continues to expand steadily, with moderate growth in consumer spending and a pickup in residential investment (housing). He indicated supply chain troublespots that contribute to price pressures improving, which has helped ongoing demand and the overall performance of the U.S. economy.
Labor Market Cooling: A Positive Sign
Powell emphasized that the labor market has cooled significantly since the post-pandemic situation, when there are more job openings than job-seekers. While still at a historically low level of 4.1 percent in June, the unemployment rate is trending upward. At the same time, payroll job gains averaged 222,000 jobs per month in the first half of the year, which indicates strong job creation. Powell explained the increase in the supply of workers due to higher labor force participation and immigration has helped narrow the jobs-to-workers gap.
Inflation: Drifting Closer to Target Level
Inflation has eased over the past few years but remains above the Federal Reserve’s 2% goal. Powell acknowledged that the most recent monthly readings have shown slow but continued progress. He clarified that more good data is needed to strengthen confidence that inflation is moving sustainably toward the Fed’s target.
Monetary Policy: A Game of Balancing Risks
Since last July, the Federal Reserve has maintained the target range for the federal funds rate at 5-1/4% to 5-1/2%. Powell reiterated that the central bank does not expect it will be appropriate to reduce this rate until there is greater confidence that inflation is moving sustainably toward 2 percent.
Regarding adjustments to the Fed funds target range, the Fed will continue to assess incoming data and their implications for the economic outlook, the balance of risks, and the appropriate path of monetary policy. Powell emphasized that reducing interest rates too soon or too much could stall or even reverse the progress made on inflation. On the other hand, he acknowledged that lowering the rates too late or too little could weaken economic activity and employment.
The Path Forward: A Delicate Balancing Act
Powell’s testimony highlighted the delicate balancing act faced by the Federal Reserve. On one hand, the central bank is committed to bringing inflation back down to its 2% goal. On the other hand, the potential risks to economic activity and employment must also be considered if the policy is too tightened.
Key Takeaway
Powell’s testimony before the Senate provided an updated view of the current economic landscape. While progress has been made in the fight against inflation and the labor market has cooled, more data is needed for the Fed to have confidence that inflation is moving sustainably toward the Fed’s target.
The overriding message continues to be the Federal Reserve remains committed to its dual mandate of maximum employment and price stability, and its decisions will continue to be guided by incoming data and their implications for the evolving economic outlook.
