Federal Reserve Chairman Jerome Powell reiterated his long-held stance that interest rates will remain on hold until the economy makes significant progress toward the central bank's 2% inflation target.
Powell made the remarks Tuesday as he delivered the Fed's semi-annual monetary policy report to the Senate Committee on Banking, Housing and Urban Affairs.
Asked directly when interest rates might be cut, the governor said: “I am not sending any signal today about the timing of future action.”
What you need to know: Federal Reserve Chairman Jerome Powell testified before Congress on Tuesday, reiterating his long-held stance that interest rates will remain steady until the economy has made significant progress toward the 2% inflation target.
Chairman Powell said the Fed's next policy action is unlikely to be an interest rate hike. It is more likely to ease policy or cut rates “at the appropriate time” as the Fed continues to take steps to combat inflation and the labor market remains strong. Inflation has eased over the past two years, but the latest personal consumption expenditures price index rose to 2.6% in the 12 months through May, above the Fed's long-term target of 2%. Since last July, the Fed has kept interest rates at 5.25% to 5.5% while reducing its securities holdings.
He said the Fed's next policy move is unlikely to be a rate hike, and that with the central bank doing more to combat inflation and the labor market remaining strong, it's more likely to ease policy or even cut rates “at the appropriate time.”
“The Federal Reserve remains focused on its dual mission of promoting maximum employment and stable prices for the benefit of the American people,” he said.
While inflation has eased over the past two years, the latest personal consumption expenditures reading rose to 2.6% for the 12 months through May, above the Fed's long-term target of 2%.
Powell said consumer spending growth also slowed in the first half of the year but remained strong. The unemployment rate remained low at 4.1% in June, and the number of employed people increased by an average of 222,000 per month in the first half of the year, thanks to an increase in the supply of workers from immigration and an increase in the labor force participation rate among people ages 25 to 54.
The Fed has kept its FOMC rate steady at 5.25% to 5.5% since July last year while also reducing its securities holdings, which has helped to improve the balance between supply and demand in the economy and put downward pressure on inflation, he said.
“We continue to make decisions at each meeting, knowing that easing policy restraints too soon or for too long could stall or reverse the progress we've seen on inflation,” he said.
He also acknowledged that cutting interest rates too late or too little could weaken economic activity and employment.
He said the U.S. economy has outperformed other developed economies with central banks. He noted that the success of the U.S. economy is due to a 2% annual productivity growth rate for 40 years, compared with 1% annual productivity growth in Europe, and a financial system that can provide financing to early-stage companies. This combination has made the U.S. economy more innovative, more flexible, and growing faster.
During the roughly two-hour testimony, Powell was repeatedly asked about the impact high interest rates have on home affordability, with mortgage rates hovering near 7% and home prices continuing to rise.
“The best thing we can do is get inflation under control, get interest rates down so we have a more normal interest rate system and a more normal housing system,” he said, while acknowledging that a housing shortage would remain even after interest rates were lowered. But policies to increase housing supply “are in the hands of states and Congress, not the Fed.”