Powell’s increased focus on cooling labor market boosts hopes for Fed rate cuts

Fed Chairman Jay Powell reiterated Wednesday that he is paying more attention to a cooling labor market, a sign market analysts see as the central bank moving closer to a rate cut.

“I think we’ve had to focus very much on the inflation mandate for a long time,” Powell told lawmakers, referring to one side of the central bank’s dual mandate to maintain both stable prices and maximum employment.

“But I think we’re now at the point where the labor market is back in balance, as it should be. So we’re looking at both sides.”

The Fed has kept interest rates at a 23-year high for nearly a year in an effort to curb inflation.

Now that inflation is starting to cool again, Powell is making clear that the central bank is increasingly aware of the risks posed by a cooling labor market.

The latest evidence of that came last Friday when a new report showed that the unemployment rate rose by a tenth of a percent in June for the second straight month to 4.1%. While that’s still historically low, it’s up from 3.4% at the start of last year.

Read more: How does the labor market affect inflation?

WASHINGTON, DC - JULY 10: Federal Reserve Bank Chairman Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve's semiannual monetary policy report at the U.S. Capitol on July 10, 2024 in Washington, DC. Powell discussed lowering inflation rates and stated WASHINGTON, DC - JULY 10: Federal Reserve Bank Chairman Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve's semiannual monetary policy report at the U.S. Capitol on July 10, 2024 in Washington, DC. Powell discussed lowering inflation rates and stated

Federal Reserve Chairman Jerome Powell speaks to lawmakers in the House of Representatives on Wednesday. (Photo by Bonnie Cash/Getty Images) (Bonnie Cash via Getty Images)

Powell’s acknowledgement of these labor market risks is a sign to Fed watchers that a rate cut is coming, possibly as early as September.

However, the central bank governor declined to specify on Wednesday when the rate cuts might come into effect, making it clear that more data on the slowing inflation is still needed.

Powell said he is confident inflation is approaching its target, but the key question now is whether the central bank has sufficient confidence that inflation will return to its 2% target.

“I’m not ready to say yet,” Powell said.

Read more: What the Fed’s rate decision means for bank accounts, CDs, loans and credit cards

Powell spoke before the House Financial Services Committee on Wednesday as part of his semiannual mandatory congressional appearances. He testified before the Senate Banking Committee on Tuesday.

Powell spent some time on Wednesday, as he did on Tuesday, defending the central bank’s independence in a year of heated election results.

Patrick McHenry, chairman of the House Financial Services Committee, told Powell: “You cannot allow politics to cloud the Fed’s monetary policy.”

Another Republican lawmaker, Mike Lawler, asked Powell whether he recognizes that a September rate cut “could be considered political just 30 to 60 days before the election.”

Powell denied that politics played a role in the central bank’s decisions.

“It’s just not appropriate to think about election cycles,” he said.

And he promised that he would remain at his office after the November election results, regardless of the outcome.

“This is my fourth presidential run at the Fed, and I can tell you that we go back to work the next day and do our job.”

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