Powell Not Prepared Yet to Say He’s Confident About Inflation

Jerome Powell (Tierney L. Cross/Photographer: Tierney L. Cross/B)

(Bloomberg) -- Federal Reserve Chair Jerome Powell said he believes inflation is receding, but isn’t yet confident that price gains are sustainably slowing to the central bank’s 2% goal.

“I do have some confidence” that inflation is receding, the Fed chief told House lawmakers on his second day of testimony in Washington. 

“The question is: Are we sufficiently confident that it is moving sustainably down to 2%? And I’m not prepared to say that yet.”

Powell said recent price readings have shown “modest further progress,” and “more good data” would strengthen the central bank’s confidence that inflation was returning to its 2% target, reiterating testimony he gave Tuesday to the Senate Banking Committee.

The Fed chair has avoided giving any strong signals on the timing of interest rate cuts, though he has emphasized policymakers face risks from both moving too quickly or too slowly to take action.

Those risks are now more balanced than they were, Powell said, and while Fed officials are still committed to bringing inflation down, they are also concerned about unemployment. 

“The job is not done on inflation, we have more work to do there,” he said, adding that policymakers are also very focused on “considerable softening in the labor market.”  

Powell’s remarks to Congress suggest the Federal Open Market Committee is unlikely to reduce rates when it meets on July 30-31. The Fed has held its policy rate in a range of 5.25% to 5.5%, a more than two-decade high, for nearly a year.

Balance Sheet

Powell also told lawmakers that Fed officials have more work to do on trimming their balance sheet.

“We’ve made quite a lot of progress. We think we have a good ways to go,” he said in testimony before the House Financial Services Committee.

The US central bank has reduced its holdings by about $1.7 trillion so far and officials expect to shrink the balance sheet substantially more, continuing to offload holdings that ballooned as the Fed snapped up Treasury securities and mortgage-backed securities to stabilize markets and support the economy during the pandemic.

The Fed in June slowed the pace at which it is letting bonds run off its balance sheet, a move Powell said will allow officials to move more carefully as they work to prevent their bond holdings from falling too low. Policymakers want to avoid a repeat of 2019 when a shortage of reserves led to a spike in short-term borrowing costs. 

“Going a little bit slower might actually enable us to go further,” Powell said.

Bank Rules

Powell reiterated comments he made to the Senate Banking Committee on Tuesday that regulators are close to agreeing to change their plan to force big banks to hold significantly more capital — a move that could mark a major win for Wall Street banks. 

He said a revamped version of their proposal, which could have forced the biggest US lenders to hold as much as 19% more capital to buffer against losses, is undergoing discussions with other banking agencies and will be issued very soon. He added that not all parts of the plan will be republished for comment.

Asked whether the Fed is a leader among equals, he said the conversations between the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency have been “strictly collaborative” and “very productive” thus far, despite a lack of agreement on the path forward with the Fed’s Michael Barr, who is seen as the architect of the plan.

“Banks will have to live with the changes for long time,” Powell said of the eventual final rule.

September Clues

Markets are focused on whether officials will provide more clues after the July gathering about a possible rate cut in September.

While the labor market has held up under pressure from higher interest rates, an uptick in the unemployment rate has added political pressure on Fed officials to start reducing borrowing costs.

The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022. While unemployment remains low at 4.1%, it has ticked up in each of the last three months.

--With assistance from Katanga Johnson, Alexandra Harris, Charles Ayitey and Reade Pickert.

(Updates to lead with Powell’s comments on inflation and the labor market.)

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