Powell Flags Rising Risks to Jobs While Avoiding Rate-Cut Timing

(Bloomberg) — Federal Reserve Chair Jerome Powell said officials are increasingly wary of potential risks to the labor market from high borrowing costs as they seek more evidence inflation is slowing down.

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Speaking to lawmakers Tuesday, Powell was careful not to offer a timeline for interest-rate cuts, which investors are now betting will begin in September. But he emphasized mounting signs of a cooling job market after government data published July 5 showed a third straight month of rising unemployment.

“Elevated inflation is not the only risk we face,” Powell said in prepared remarks before the Senate Banking Committee.

“The latest data show that labor-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,” he later added.

The Fed chief is on Capitol Hill this week to deliver his semi-annual monetary policy testimony to Congress. He will conclude two days of hearings on Wednesday with an appearance before the House Financial Services Committee, beginning at 10 a.m. in Washington.

The US central bank is weighing rate cuts after holding its benchmark at a more than two-decade high for nearly a year in a bid to curb inflation. While the labor market has so far largely held up, a slowdown in the jobs data has raised pressure on Fed officials to begin easing policy.

“His focus is squarely on the labor market,” said Derek Tang, an economist at LH Meyer, a policy analysis firm in Washington. “Further softening in the labor market, even if further disinflation is not delivered, is enough to spur action.”

Still, the Fed chair emphasized that cutting rates too soon or too much could stall or reverse progress on inflation, which has come down from a peak of 7.1% in June 2022 to 2.6% as of May.

“More good data would strengthen our confidence that inflation is moving sustainably toward 2%,” Powell said. His comments confirmed the central bank’s policy-setting Federal Open Market Committee is unlikely to reduce rates when it next meets on July 30-31.

Fed officials have welcomed recent data indicating inflation is decelerating again following an unexpected jump in prices at the start of the year, though several have also said they need more confidence that the trend will continue before reducing borrowing costs.

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A monthly report on consumer prices due Thursday from the Bureau of Labor Statistics is expected to show another 0.2% rise in a measure excluding food and energy in June, which would mark the smallest back-to-back gains since August.

A number of economists are warning that there’s a slowdown afoot in the job market that could worsen. The number of people who have been looking for a job for 15 weeks or more rose in June to the highest level since early 2022, when that measure was rapidly declining.

What Bloomberg Economics Says…

“Powell’s remarks to lawmakers are rife with references to labor-market risks. The Fed now appears to be placing equal weight on the employment leg of its dual mandate — in contrast to the past two years, when it explicitly prioritized price stability. Given our forecast for the unemployment rate to climb to 4.5% in 4Q, we expect that by year-end the Fed will be prioritizing the employment leg of its mandate.”

—Anna Wong, economist

To read the full note, click here

Democrats on Tuesday warned Powell of potential risks to the economy from delaying rate cuts, pointing to rising unemployment, elevated housing costs and a slowdown in the manufacturing sector. Republicans largely refrained from pushing back against those arguments.

“It is very clear the labor market has cooled considerably,” said Claudia Sahm, chief economist at New Century Advisors. “The alarm bells aren’t sounding right now, but you are certainly pointed in that direction.”

Bank Capital

When asked during the hearing about a plan to boost capital requirements for the biggest banks, Powell said the Fed and other regulators are close to finalizing changes to the proposal first released in July 2023, and would likely need to seek public comment on the revised plan before finalizing it.

The Fed chief told lawmakers in March that he expected “broad and material changes” to the proposal that could require the eight largest US banks to hold about 19% more in capital as a cushion against financial shocks.

Republican lawmakers blasted the original plan, and have urged regulators to withdraw it, arguing that it has “fatal problems” and could pose a risk to the financial system.

–With assistance from Liz Capo McCormick.

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