Powell says waiting for further data to boost confidence, rate cuts should not be too little or too late

According to the Zhitong Finance and Economics APP, Federal Reserve Chairman Powell said that "more good data" will enhance confidence that inflation is moving towards the Fed's 2% target, with recent data showing that prices have made "modest further progress."

In his prepared testimony for the Senate hearing on Tuesday, Powell warned that too little or too late of a rate cut could pose risks to the economy and the labor market.

On the first day of his two-day congressional testimony, Powell told lawmakers, "High inflation is not the only risk we face. Too late or too little policy restraint could overly weaken economic activity and employment."

Powell also stated that an early or excessive rate cut could hinder or reverse progress on inflation. "More good data will enhance our confidence that inflation is moving sustainably towards 2%." He will testify before the House Financial Services Committee on Wednesday.

Federal Reserve officials aim to bring inflation back to the 2% target following the surge in prices after the COVID-19 pandemic. Despite the resilience of the labor market under high rate pressures, the rise in the unemployment rate has increased political pressure on Fed officials to lower borrowing costs.

Powell's comments suggest that the Federal Open Market Committee is unlikely to lower interest rates at the meeting scheduled at the end of this month.

Despite fluctuations in U.S. bond yields, which rose overall today, the S&P 500 index continued to rise after Powell's testimony. Traders expect the probability of the Fed's first rate cut in September to be slightly above 70%. They anticipate two 25-basis-point rate cuts in 2024.

Federal Reserve officials have welcomed recent data, as inflation has slowed again following the surge in prices earlier this year. However, some other policymakers have indicated that they need more confidence that this trend will continue before they lower borrowing costs.

The Fed's preferred inflation gauge rose 2.6% in the 12 months ending in May, lower than the 7.1% in June 2022. Despite the unemployment rate remaining low at 4.1%, it has risen each month over the past three months.

Some economists warn that the labor market may be slowing down and the situation could worsen. In June, the number of people unemployed for more than 15 weeks rose to the highest level since early 2022.

Powell described the labor market as "strong but not overheated," adding that the central bank's restrictive stance is working to better balance supply and demand.

BNP Paribas senior economist Yelena Shulyatyeva said, "The rise in the unemployment rate in the July report may challenge our baseline forecast of a rate cut in December, increasing the possibility of two rate cuts starting in September." The Federal Reserve has been maintaining its policy interest rate at a restrictive level of 5.25% to 5.5% throughout this year. Futures traders are betting that the Fed will announce a rate cut in September, less than two months before the U.S. presidential election.

The "Fed Whisperer" Nick Timiraos wrote an article stating that in the second half of last year, despite strong spending and hiring, the rapid slowdown in the pace of price growth caught officials by surprise. This shift in focus from how high to raise rates to how soon to cut them. Powell last appeared before lawmakers in early March, hinting that the Fed might cut rates before June. Since then, inflation has reversed course, derailing any such plans. Powell today said that recent inflation data "show some modest further progress, and more good data will bolster our confidence that inflation is moving steadily toward 2%." The sharp fluctuations in inflation have put the Fed in an awkward wait-and-see position, with policymakers either waiting for convincing mild inflation data for a few months, or waiting for evidence of a significant slowdown in employment and economic activity before cutting rates