Fed Chair Powell Warns Against Prolonged High Interest Rates, Cites Economic Growth Risks

Balancing Act on Interest Rates

Speaking ahead of his two-day appearance on Capitol Hill, Powell acknowledged the economy's resilience and the strong labor market despite some recent cooling. He noted that while there has been progress in reducing inflation, it remains essential to avoid excessive policy restraint that could weaken economic activity and employment.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell said in his prepared remarks.

Inflation and Interest Rates

Powell's comments come as the Federal Reserve's benchmark interest rate remains at 5.25%-5.50%, the highest level in 23 years, following 11 consecutive hikes in response to the highest inflation since the early 1980s. The Fed aims to bring inflation down to its 2% target, and recent data has shown some progress in this direction.

Despite market expectations for rate cuts starting in September, FOMC members at their June meeting indicated a likelihood of only one cut by the end of the year.

Recent Economic Data

Powell highlighted that inflation, as measured by the Fed’s preferred personal consumption expenditures price index, was at 2.6% in May, down from a peak of over 7% in June 2022. He emphasized that continued positive inflation data would bolster confidence that inflation is moving sustainably toward the 2% goal.

“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Powell stated. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Congressional Testimony

Powell's remarks are part of the semiannual updates on monetary policy mandated by Congress. He is scheduled to face questioning from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday. These sessions often involve politically charged questions, especially during an election year, but Powell reiterated the Fed's commitment to operational independence and its non-political stance.

Political Reactions

Several Democratic committee members, including Senate Banking Committee Chair Sherrod Brown (D-Ohio), urged Powell to consider lowering rates soon to protect jobs and avoid an unnecessary recession.

“I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made on creating good paying jobs,” Brown said. “If unemployment trends upward, you must act immediately to protect Americans' jobs.”

Economic Outlook

Powell maintained that despite some signs of economic deceleration, the U.S. economy continues to grow at a solid pace. He noted that private domestic demand remains robust, with slower but still-solid increases in consumer spending. However, recent data has shown a slight increase in the unemployment rate and a slowdown in GDP growth, with both manufacturing and services sectors reporting contractions in June.

“The U.S. economy continues to expand at a solid pace despite the deceleration in GDP,” Powell said.