Fed Chair Powell Welcomes Cooling Inflation

Jerome H. Powell, the chair of the Federal Reserve, indicated on Tuesday that recent inflation data had given the central bank more confidence that price increases were returning to normal, and that continued progress along these lines would help to pave the way toward a central bank rate cut.

“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 percent,” Mr. Powell said.

He added that data earlier this year failed to provide such confidence, but that recent inflation readings “have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Mr. Powell is set to testify on Tuesday before the Senate Banking Committee, and was speaking from remarks prepared for delivery.

While Mr. Powell avoided zeroing in on a specific month for when the Fed might begin to cut interest rates, he also did little to push back on growing expectations that a reduction could come in September. Fed officials meet in late July, but few, if any, economists expect a move that early.

The chair’s congressional testimony comes at a delicate moment for the central bank. Fed officials are trying to figure out when to begin cutting interest rates, which they have held at the highest rate in decades for roughly a year now. But as they weigh that choice, they must strike a careful balance: They want to keep borrowing costs high long enough to cool the economy and fully stamp out rapid inflation, but they also want to avoid overdoing it, which could crash the economy too much and cause a recession.

While Fed officials spent 2022 and much of 2023 focused on beating back inflation, even if that came at an economic cost, price increases have cooled enough that they are now clearly taking the trade-offs between cooling inflation and weakening the labor market into account.

After jumping to 9.1 percent in 2022, Consumer Price Index inflation is expected to fade to 3.1 percent as of a June reading set for release this Thursday. Importantly, prices are now climbing very slowly on a monthly basis, a sign that inflation is coming back under control.

“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Mr. Powell said.

The inflation slowdown has come in part because supply chains have healed from pandemic-related disruptions, allowing goods prices to fall. But the progress also owes to a continued cooling in the broader economy.

That moderation in economic growth ties back to Fed policy. Starting in March 2022, central bankers raised interest rates rapidly to their current 5.3 percent before leaving them on hold at that elevated level. That has made it expensive to borrow to expand a business, to buy a car or to purchase a house — tamping down economic demand.

The job market is also slowing after years of surprising strength. Job openings have been gradually coming down after spiking following pandemic lockdowns, and the unemployment rate has been ticking steadily higher. Wage growth is also pulling back, a sign that employers aren’t paying up as much to compete for new hires.

“In the labor market, 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,” Mr. Powell said.

Altogether, Mr. Powell’s comments painted a picture of an economy that was moving toward the Fed’s goals gradually, potentially allowing for the gentle comedown that central bankers had been hoping to achieve. While it is rare for the Fed to crush serious inflation without causing a recession, officials have been optimistic that they might manage to pull it off in this episode.

Mr. Powell will respond to lawmaker questions on Tuesday, and will testify on Wednesday before the House Financial Services Committee.