MNI: Fed's Powell: Looking For More Good Inflation Data To Cut

The Federal Reserve will gain the confidence needed to start cutting interest rates if it sees more good inflation data, Chair Jerome Powell said Tuesday, boosting hopes that the U.S. central bank will lowering borrowing costs soon.

"The Committee has stated that 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%.

"Incoming data for the first quarter of this year did not support such greater confidence. 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%," Powell said in remarks prepared for his semiannual testimony to the U.S. Senate.

The FOMC raised rates quickly in 2022 and 2023 and has held its benchmark overnight rate at a 23-year high of 5.25%-5.5% for the past year in an effort to lower inflation, and Powell noted "considerable progress" on that goal in the past two years.

"Our restrictive monetary policy stance is helping to bring demand and supply conditions into better balance and to put downward pressure on inflation," he said. "We continue to make decisions meeting by meeting." (See: MNI INTERVIEW: Fed Will Stay Patient On Rocky Road To 2%-Evans)

SOFT LANDING

The Fed's preferred inflation measure, the PCE price index, has slowed to 2.6% in May from 4.0% a year earlier and from its peak of 7.1% in June 2022.

Meanwhile, growth is still solid, with consumer spending in particular holding up well, Powell said. Labor market conditions "have cooled while remaining strong." The unemployment rate has moved higher but was still low at 4.1% last month, he noted. Immigration and rising workforce participation have fueled strong job creation while wage growth has cooled.

"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," Powell said. "The risks to achieving our employment and inflation goals are coming into better balance."

Futures traders have priced in an 80% chance of a rate cut in September and two cuts by December. (See: MNI INTERVIEW: Fed Already Well Behind The Curve On Cuts - Tracy)

Cutting rates too soon or too much could stall or even reverse the decline in inflation, but cutting too late or too little could unduly weaken economic activity and employment, Powell said. "In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy."