US economy no longer overheated, Fed’s Powell tells Congress

WASHINGTON —The U.S. is “no longer an overheated economy” with a job market that has cooled from its pandemic-era extremes and in many ways is back where it was before the health crisis, Fed Chair Jerome Powell said in remarks to Congress that suggested the case for interest rate cuts is becoming stronger.

“We are well aware that we now face two-sided risks,” and can no longer focus solely on inflation, Powell told the Senate Banking Committee on Tuesday. “The labor market appears to be fully back in balance.”

Powell told lawmakers that he did not want “to be sending any signals about the timing of any future actions” on interest rates, a stance consistent with the chair’s recent efforts to focus attention more on the evolution of economic data – and the possible choices the Fed might make in response – and less on firm guidance about what might happen on what timetable.

Still, with a Nov. 5 presidential election on the horizon and just two scheduled Fed meetings before it, Powell was quizzed by Democrats about the risks to the job market of not cutting rates soon, and by Republicans about the pain to households of inflation that remains above the central bank’s 2% target.

“Any move to lower rates before Nov. 5 would be a bad perception,” Senator Kevin Cramer, Republican of North Dakota, said to Powell, said in remarks that went on to pledge support for central bank independence.

It was one of several moments in the hearing that, explicitly or not, were framed by the presidential vote, the political sensitivity of coming Fed decisions, and suggestions by some close to Republican candidate and former President Donald Trump that the Fed should be brought under tighter political oversight – a counter to widely accepted norms.

Powell throughout the hearing emphasized the importance of Fed independence in rate setting, as well as his own intent to stick with data-based decision-making.

His views on that front, analysts said, seemed to at least edge the door open to a rate cut as soon as September.

“His emphasis has shifted a bit towards a balance of risks within the Fed’s mandate,” said Christopher Hodge, chief economist for the U.S. at Natixis in New York. “The Fed needs to get ahead of weakness in the labor market…It appears as if the foundation is being laid for a pivot in September.”

Powell’s semiannual appearance in the Senate will be followed by a hearing in the House set for Wednesday at 10 a.m. EDT (1400 GMT).

While Powell’s opening remarks focused on a review of the economy and monetary policy, questioning from senators keyed in on housing costs and even more so on proposed changes in bank regulations that the Fed is debating internally.

Powell in his prepared remarks told Senators that inflation had been improving in recent months and that “more good data would strengthen” the case for looser monetary policy.

The Fed has kept its policy rate in the 5.25% to 5.5% range since July of 2023.

His remarks appeared to show increasing faith that inflation will return to the Fed’s target, contrasting the lack of progress on inflation in the first months of the year to recent improvement that has helped build confidence that price pressures will continue to diminish.