“Powell Highlights Dual Threats to U.S. Economy: Inflation and Weakening Labor Market”

Fed Chairman Jerome Powell testified Tuesday at a Senate committee hearing on July 9. Photo: Tierney L. Cross/Bloomberg via Getty Images

Powell Warns of Dual Economic Threats

Federal Reserve Chairman Jerome Powell addressed the Senate Banking Committee on Tuesday, highlighting that a weakening labor market now poses as significant a risk to the U.S. economy as high inflation.

Economic Balancing Act

In his testimony, Powell emphasized the delicate balance the Fed must maintain. “In light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face,” he noted. He stressed that reducing policy restraint too late or too little could unduly weaken economic activity and employment.

Powell’s comments come at a time when the Federal Reserve has kept interest rates at a two-decade high for a year, aiming to curb inflation. However, he acknowledged that lowering rates too soon could reverse the progress made on inflation.

The Fed’s Cautious Approach

During the hearing, Senator John Kennedy (R-La.) pressed Powell for a timeline on lowering interest rates. Powell refrained from providing specifics, stating he was not going to send any “signals about the timing of any future actions.” The Fed’s stance is to wait for more concrete economic data confirming a sustained decrease in inflation before adjusting rates.

The economic landscape remains precarious. Although inflation has significantly decreased from its peak, it remains above the Fed’s 2% target. Simultaneously, the job market shows signs of strain, with the unemployment rate rising to 4.1% last month, the highest since 2021.

Labor Market Concerns

Powell pointed out that while the labor market has returned to its pre-pandemic state, it is “strong, but not overheated.” Despite recent data indicating a cooling labor market, unemployment remains at a historically low level. He also mentioned that some Democrats, like Senator Elizabeth Warren (D-Mass.), have urged the Fed to lower rates to support the job market.

Senator Sherrod Brown (D-Ohio) expressed concern that delaying rate cuts could undo the progress on job creation. On the other hand, Senator Kennedy highlighted the public’s unease, stating, “People just don’t feel better off today.”

Future Rate Cuts?

Market expectations are leaning towards a rate cut in September. The CME’s Fedwatch tool indicates a 72% probability of at least one interest rate cut by the Fed’s policy meeting on September 18, up from 64% the previous week.

Powell also touched on the impact of increased immigration on the labor market. He noted that higher immigration rates have temporarily eased labor market tightness but could exacerbate the housing market’s challenges in some regions.

Looking Ahead

Powell is scheduled to testify before the House Financial Services Committee on Wednesday, where he will likely face further questions on the Fed’s approach to managing inflation and employment.

In his closing remarks, Powell reiterated the Fed’s commitment to data-driven decision-making, aiming to strike a balance that supports both economic growth and stability.

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