Federal Reserve Chairman Jerome Powell reiterated Tuesday in his semi-annual testimony before the Senate Banking Committee that it would “not be appropriate” to cut interest rates until there is greater confidence that inflation is sustainably trending toward 2%.
Powell told the Senate committee that easing policy restraints too soon or for too long could stall or reverse progress against inflation.
“We need more and better data on inflation,” Powell said, adding that the timing of any rate cuts would depend on the data. He also reiterated comments made in June that an unexpected weakening of the labor market could lead to lower interest rates.
Powell: Economy is no longer overheating
The Federal Reserve chairman said the U.S. economy has made good progress toward its 2% inflation target, adding that recent monthly data point to further modest progress and that more favorable data would strengthen confidence that inflation is on a sustained path toward the target.
“This is no longer an overheated economy,” Powell said. “By most measures, this is an economy that’s pretty much back to where it was before the pandemic.”
He said the recent drop in inflation was due to improving supply factors, including cooling demand as pandemic-related disruptions were resolved and the labor market equalized.
“Labor market indicators suggest that conditions are back to pre-pandemic levels: strong but not overheated. The latest labor market data suggests that conditions are significantly cooler than they were two years ago.”
While progress has been made in containing inflation and cooling the labor market, Powell said, “higher inflation is not the only risk we face.”
He said tapering policy restraints too late or by too little could weaken economic activity and employment too much.
Powell said a rate hike was unlikely, adding that the option was not on the cards.
“With inflation moving further forward and the labor market continuing to perform strongly, it seems likely that we will begin to ease policy at the appropriate time,” Powell said.
Regarding the housing market, Chairman Powell addressed the significant housing issues in the country, noting that tighter monetary policy is impacting interest-sensitive spending, particularly in the housing sector.
The best way to support the housing market is to achieve a sustainable 2% inflation rate and lower interest rates to return the market to pre-pandemic normality, he said.
“We know there is a housing shortage and it is an urgent need for many people,” Powell said, adding that the problem should be addressed with fiscal policy, not monetary policy.
Market reaction to Chairman Powell
The market interpreted Powell’s comments as slightly more hawkish than expected, sending the U.S. dollar soaring against other major currencies and sending Treasury yields higher.
The yield on the 10-year Treasury note rose 3 basis points to 4.31%, leading to declines in bond-related assets. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) fell 0.7%, on track to end a four-day winning streak.
Stocks reacted mixedly to Powell’s comments, with the S&P 500, tracked by the SPDR S&P 500 ETF Trust (NYSE:SPY), broadly holding onto its session gains, up 0.2%, while the Nasdaq 100, tracked by the Invesco QQQ Trust (NASDAQ:QQQ), pared gains slightly.
By sector, energy, financial, utilities and healthcare stocks rose following Powell’s speech, while technology stocks fell.
The Financial Select Sector SPDR Fund (NYSE:XLF) was up 0.5% on the day, outperforming all other S&P 500 sectors.
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Illustration created using artificial intelligence via MidJourney.
