Fed’s Powell points to slowing labor market as sign that rate cuts may be imminent

WASHINGTON (AP) — The Federal Reserve is facing a cooling of the labor market Along with persistently high prices, Chairman Jerome Powell said in written testimony Tuesday, a shift in focus from the Fed’s fierce fight against inflation over the past two years suggests it is moving closer to cutting interest rates.

The Fed has made “considerable progress” toward its goal of defeating the worst inflation spike in four decades, Powell said in testimony before the Senate Banking Committee.

“Inflation has come down significantly” over the past two years, he added, although it still remains above the central bank’s 2% target.

Powell pointedly stressed that “high inflation is not the only risk we face.” Cutting rates “too late or too little could unduly weaken economic activity and employment,” he said.

The Fed chairman will address the Senate in the first of two days of semiannual testimony before Congress. On Wednesday, he will testify before the House Financial Services Committee.

Between March 2022 and July 2023, the Fed raised its benchmark interest rate 11 times to 5.3%, its highest level in two decades, to combat inflation, which peaked at 9.1% two years ago. Those hikes raised the cost of consumer borrowing by raising rates on mortgages, auto loans and credit cards, among other forms of borrowing. The goal was to slow borrowing and spending and cool the economy.

In the past, Powell and other Fed officials have repeatedly stressed that the strength of the economy and low unemployment meant they could be patient in cutting rates and wait to ensure that inflation was truly under control.

But on Tuesday, Powell said the labor market had “cooled but remained strong.” He added that the economy’s growth had slowed after a strong expansion in the second half of last year. Last week, the government reported that hiring remained strong in June, although the unemployment rate rose for a third straight month to 4.1%.

Powell’s prepared testimony Tuesday didn’t provide what Wall Street investors are watching closely: a clear indication of when the Fed might make its first rate cut. But the testimony is likely to reinforce expectations among investors and economists that the first reduction will come at the central bank’s September meeting.

Last week, Powell said At a monetary policy conference in Portugal, Fed officials said there had been “considerable progress on inflation,” something Fed officials said they needed to see consistently before they felt confident enough to cut rates. In May, year-over-year inflation fell to 1.1%. only 2.6%by the Fed’s preferred measure, not far from its 2% target and down sharply from a peak of 7.1% two years ago.

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On Thursday, the government will publish the latest reading of the best-known consumer price indexThe CPI is expected to show an annual increase of only 3.1% in June, down from 3.3% in May.

Such signs of slowing inflation, along with evidence that the economy and labor market are…