Fed's Powell shifts focus away from inflation as US interest rate cuts come into view

'We're very much aware that we have two sided risks now,' US central bank chief tells Congress

Federal Reserve chairman Jerome Powell testifies before the US Senate banking committee in Washington. Bloomberg

Federal Reserve chairman Jerome Powell on Tuesday shifted the discussion on the timing of cutting interest rates to the labour market, acknowledging that the once red-hot US economy is now showing signs of cooling.

In a testimony before the US Senate banking committee, Mr Powell noted the “modest further progress” the Fed has made in taming inflation. The Fed's preferred inflation metric fell to 2.6 per cent in June, down from its 7.1 per cent peak in 2022, but still above its long-term 2 per cent goal.

With this progress made on inflation, Mr Powell said he and his colleagues at the policy-setting Federal Open Market Committee are waiting on “more good data” to reach the confidence threshold needed to begin cutting rates.

The Fed has kept its target rate unchanged at 5.25 per cent to 5.50 per cent since last July. Central banks in the UAE and Saudi Arabia, which follow the Fed's lead, have also held interest rates steady since then.

But “elevated inflation is not the only risk we face”, Mr Powell said in prepared remarks. He testifies before the House Financial Services Committee on Wednesday.

He pointed to the cooling labour market, where the unemployment rate unexpectedly rose to 4.1 per cent last month. June marked the third straight month in which the unemployment rate increased.

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

“We're very much aware that we have two-sided risks now … and we're determined to balance those as best we can.”

The US added 206,000 jobs in June, according to last week's jobs report, and downwards revisions showed the jobs market was not as strong as previously reported in April and May.

“The latest data show that labour-market conditions have now cooled considerably from where they were two years ago, and I wouldn’t have said that until the last couple of readings,” Mr Powell said.

Unlike other central banks, the Fed has a dual mandate of price stability and maximum employment. The Fed raised rates to its current level in 2022 in the hopes of achieving a so-called soft landing, in which it slows the economy down without driving up unemployment or pushing it into a recession.

Mr Powell said the labour market has moved closer to its pre-pandemic levels and is “strong, but not overheated”, using language taken from the Fed's monetary policy report.

Released last week, the Fed's semi-annual report said inflation is easing while the labour market is moving into better balance.

On the back of recent data, investors are pencilling in an initial rate cut in September before a second rate cut in December, according to data from CME FedWatch.

Inflation data released on Thursday is expected to give investors a stronger case to predict a September rate cut. Projections from Oxford Economics anticipate headline and core Consumer Price Index inflation to increase 0.1 per cent and 0.2 per cent, respectively.

“This would be another benign inflation print from the Federal Reserve's perspective and reinforces our baseline forecast for a September rate cut,” Bernard Yaros, lead economist at Oxford Economics, wrote to investors.

The S&P 500 and Nasdaq reached new high closes following Mr Powell's testimony and gains were made by chip maker Nvidia.