Powell Signals Potential Rate Cut Amid Positive Inflation Data and Economic Stability

Federal Reserve Chair Jerome Powell appeared before the Senate Banking Committee on Tuesday, indicating that more positive data would boost the central bank's confidence in inflation moving towards its 2 percent target, potentially leading to an interest rate cut.

Powell stated that the Committee does not expect to lower the federal funds rate until there is greater confidence in inflation sustainably reaching 2 percent. While first-quarter data did not inspire this confidence, recent inflation readings have shown modest progress. Better data would further reinforce this confidence.

Powell's remarks follow a Commerce Department report showing that core consumer prices' annual growth rate slowed to 2.6 percent in May from 2.8 percent in April. The Labor Department is set to release June's consumer price inflation report on Thursday, with economists predicting a slowdown in the annual consumer price growth rate to 3.1 percent from 3.3 percent in May, and the core rate holding steady at 3.4 percent.

The Fed Chair also warned that maintaining high interest rates for too long could harm economic growth. He emphasized that reducing policy restraint too late or too little could weaken economic activity and employment, despite progress in lowering inflation and cooling the labor market over the past two years.

Discussing the U.S. economy, Powell noted it continues to expand at a solid pace. GDP growth has moderated in the first half of this year after strong performance in the latter half of last year. Private domestic demand remains robust, with consumer spending increasing at a slower but still solid rate. The labor market has returned to pre-pandemic conditions: strong, but not overheated.