Fed Chair Powell Warns Prolonged High Rates Could Hinder Economic Growth

Last updated: July 9, 2024

fed_chair_jerome_powell_on_a_senate_hearingFederal Reserve Chair Jerome Powell on Tuesday sounded the alarm about the risks of keeping interest rates elevated for too long, cautioning that such a move could stifle economic growth.

As he prepped for his two-day stint on Capitol Hill, Powell noted the economy’s resilience and a robust labor market, despite recent cooling.

He highlighted some easing in inflation but remained steadfast in achieving the Fed’s 2% inflation target.

“With the progress made in lowering inflation and cooling the labor market over the past two years, we face more than just the risk of elevated inflation,” Powell stated in his prepared remarks.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

Powell’s comments come close to the one-year mark since the Federal Open Market Committee last raised benchmark interest rates.

The Fed’s overnight borrowing rate, now at 5.25%-5.50%, stands at its highest in 23 years after 11 consecutive hikes following inflation peaking at levels unseen since the early 1980s.

Markets anticipate the Fed will start cutting rates in September, with another reduction by year-end. However, FOMC members suggested only one cut during their June meeting.

‘Strengthen Our Confidence’

Recently, Powell and his colleagues have seen encouraging inflation data, following a surprising uptick earlier this year.

The Fed’s favored personal consumption expenditures price index showed inflation at 2.6% in May, down from a peak above 7% in June 2022.

“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,” Powell said.

“More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

These statements are part of Powell’s semiannual updates on monetary policy to Congress.

Following his remarks, he will field questions from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

In prior sessions, Powell has sidestepped dramatic policy announcements and navigated politically charged questions from committee members.

This year’s questioning could be intense, with Washington on edge amid a volatile presidential campaign.

Several Democratic committee members, including Sen. Sherrod Brown (D-Ohio), urged Powell to lower rates soon.

“I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the undo the progress we’ve made on creating good paying jobs,” Sen. Sherrod Brown (D-Ohio), the committee chair, told Powell.

“If unemployment trends upward, you must act immediately to protect Americans jobs. Workers have too much to lose if the Fed overshoots [its] inflation target and causes a completely unnecessary recession.”

Powell reiterated that the Fed operates independently and does not engage in political decision-making. “Operational independence is crucial for the Fed to do its job,” he emphasized.

Powell’s other remarks centered on the broader economy, with recent data showing a slight uptick in unemployment and a slowdown in GDP growth.

Both services and manufacturing business sectors reported contraction in June.

Nevertheless, Powell asserted, “the U.S. economy continues to expand at a solid pace” highlighting robust private domestic demand and steady consumer spending.

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