Federal Reserve Chair Jerome Powell expressed concerns about the negative impact of keeping interest rates high for an extended period on economic growth during a House Financial Services Committee hearing on the “Federal Reserve’s Semi-Annual Monetary Policy Report.” Despite acknowledging the strength of the economy and labor market, Powell highlighted the need to bring inflation down to the 2% goal set by policymakers. He warned against reducing policy restraint too late or too little, emphasizing the risk of weakening economic activity and employment if not managed effectively.
Powell’s remarks set the stage for a two-day appearance on Capitol Hill, coinciding with the approaching one-year anniversary of the last Federal Open Market Committee interest rate hike. With the overnight borrowing rate currently at its highest level in 23 years, markets expect the Fed to begin cutting rates in September and possibly follow up with another reduction by the year-end. While recent inflation data has shown some encouraging signs, Powell stressed the importance of continued progress towards the 2% inflation objective to sustainably support economic growth. The Fed’s focus remains on maintaining operational independence to fulfill its mandate amidst economic challenges.
In response to pressure from Democratic committee members to lower rates soon, Powell reaffirmed the Fed’s role as an apolitical entity that prioritizes its mandate over external influences. Despite concerns about rising unemployment and slowing GDP growth, Powell remains optimistic about the U.S. economy’s solid expansion, driven by robust private domestic demand and consumer spending. The upcoming questioning from Senate Banking Committee members and the House Financial Services Committee could highlight the challenges facing the Fed in balancing economic goals with political pressures in a volatile environment.