Powell Optimistic About Cooling Inflation

Federal Reserve Chairman Jerome Powell testified before Congress for a second day following the central bank’s decision to maintain steady interest rates last week. During a Senate Banking Committee hearing, Powell expressed his belief that the United States could see a decrease in inflation without a significant rise in unemployment. Responding to a question from Senator Tina Smith, Powell stated that he saw a path where inflation could cool without harming middle-class families or causing substantial job losses.

Economists have noted that the labor market’s strength has been the most surprising aspect of the U.S. economy this year, despite the Federal Reserve’s rapid interest rate hikes over the past 15 months. While some experts view the resilient labor market as a sign of a “soft landing” or a mild recession as the Fed tightens monetary policy, others express concerns about the potential difficulty in reaching the central bank’s 2% inflation target. Harvard economist Jason Furman suggested that unemployment rates may need to rise to around 10% to bring inflation back on target, while current forecasts predict an increase to 4.5% by the end of 2024.

Powell reassured senators that the Fed is proceeding cautiously, aiming to avoid going too far in its actions. He emphasized that a “strong majority” of Fed officials believe two more 25 basis point rate hikes will be implemented by the end of the year, bringing the Fed’s rate to a range of 5.5%-5.75%. Additionally, Powell addressed concerns about the banking sector, stating that the Fed is collaborating with small banks that have a concentration in commercial real estate loans. He emphasized the Fed’s commitment to working through potential issues and avoiding a repeat of large bank failures that could impact the overall banking system.