Jerome Powell doesn't give much away on rate cuts, USD steadies

Federal Reserve Chair Jerome Powell, in his testimony to Congress on Tuesday, highlighted the dual challenges of a cooling job market and persistently high prices. This marks a shift from the Fed’s intense focus on combating inflation over the past two years and suggests a potential move toward cutting interest rates.

Federal Reserve Chair Jerome Powell informed the Senate Banking Committee that the Fed has made "considerable progress" toward overcoming the most severe inflation spike in four decades. "Inflation has eased notably over the past two years," Powell added, "though it still remains above the central bank’s 2% target."

Powell emphasized that "elevated inflation is not the only risk we face." He cautioned that cutting interest rates "too late or too little could unduly weaken economic activity and employment."

The Fed chair addressed the Senate panel on the first of two days of semi-annual testimony to Congress. On Wednesday, he is scheduled to testify before the House Financial Services Committee.

The Fed raised its benchmark interest rate 11 times from March 2022 to July 2023, reaching a two-decade high of 5.3% to combat inflation, which had peaked at 9.1% two years prior. These rate hikes increased the cost of consumer borrowing, affecting mortgages, auto loans, credit cards, and other forms of credit. The objective was to slow down borrowing and spending to cool the economy.

On Tuesday, Powell remarked that inflation reports for the first three months of this year did not increase Fed officials' confidence that inflation was being brought under control.

Powell informed the Senate committee, "The most recent inflation readings, though, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%."

In the past, Powell and other Fed policymakers have consistently emphasized that the strength of the economy and low unemployment rate allowed them to exercise patience in considering rate cuts, ensuring that inflation was genuinely under control before taking action.

However, on Tuesday, Powell noted that the job market has "cooled considerably." He also mentioned that the economy's growth has moderated following a robust expansion in the second half of last year. Last week, the government reported solid hiring figures for June, although the unemployment rate rose for a third consecutive month to 4.1%. Under questioning, the Fed chair stated, "The job market is not a source of broad inflationary pressures for the economy."

Powell did not address what Wall Street investors are most eagerly awaiting: a clear indication of when the Fed might initiate its first rate cut. However, his testimony is expected to reinforce investors' and economists' beliefs that the first reduction could occur at the central bank’s September meeting.

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