Federal Reserve’s Powell says “more good data” could open door to interest rate cuts

Federal Reserve Chair Jerome Powell said Tuesday that “more good data” could open the door to interest rate cuts, citing recent reports that show that the labor market and inflation are continuing to cool. 

The central bank left its benchmark interest rate unchanged at its June meeting, and penciled in only one rate cut in 2024 versus its previous forecast of three cuts this year, after digesting data showing inflation remains stubbornly high. Following a flurry of rate hikes, the Fed’s federal fund rate since July of 2023 has remained in a range of 5.25% to 5.5% — the highest in 23 years.

Speaking Tuesday morning at a Senate Banking Committee hearing, Powell stressed that the central bank wants to see further progress in bringing the annual inflation rate to about 2% before cutting rates, with the most recent consumer price index at 3.3%. But the chair also noted that the Fed is concerned with the risks of waiting too long to cut rates, noting that “elevated inflation is not the only risk we face.”

The next “likely direction seems to be …. that we loosen policy at the right moment,” Powell said at the hearing, adding that he believed it would be unlikely for the Fed to increase rates. 

Recent economic indicators suggest “that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated,” Powell added. 

Powell’s comments suggest “a September interest rate cut remains very much in play,” noted Capital Economics in a Tuesday research note.

Recent economic data shows some signs of cooling. For instance, the jobless rate, while is still low, has increased slightly to 4.1% in June, while payroll job gains averaged about 222,000 per month in the first six months of 2024, he added. The jobs-to-workers gap has declined from a pandemic peak and now is at about its 2019 level, Powell noted. 

The next big piece of economic data the Fed will digest arrives on Thursday with the release of the June consumer price index. Economists expect that inflation rose at a 3.1% annual rate last month, according to financial data firm FactSet.