Powell signals shift in monetary policy

From Bloomberg on today's remarks by #FederalReserve Chair Jay Powell:

“The #Fed chief also cemented a shift in tone among some central bank officials toward emphasizing potential risks to the labor market, alongside their continued focus on lowering #inflation. 
“Now that…

— Mohamed A. El-Erian (@elerianm) July 15, 2024

Federal Reserve Chair Jerome Powell signaled a notable shift in the balance of risks in U.S. monetary policy at a Senate Banking Committee hearing on Capitol Hill. Addressing Senators, Powell acknowledged that the focus is moving away from inflation concerns toward the employment side, marking a crucial development for the American economy. Under questioning from Sen. Chris Van Hollen (D-MD),

Fed Chair Jay Powell passed on an opportunity to change expectations that the central bank will hold rates steady at its next meeting.

The Q2 inflation data "do add somewhat to confidence" that inflation is returning to 2% https://t.co/4pekcX58o2

— Nick Timiraos (@NickTimiraos) July 15, 2024

Powell conceded that recent data indicates a significant cooling in labor market conditions compared to two years ago. The latest data show that labor market conditions have now cooled considerably from where they were two years ago, and I wouldn’t have said that until the last couple of readings,” Powell remarked. He emphasized the need to manage both inflation and employment risks, noting their equal importance under the law.

Someone told Fed Chair Powell "hey, cut rates!" in the Marriott Marquis Hotel elevator this morning on his way to The Economic Club of Washington DC interview.

Powell says he just replied thank you. pic.twitter.com/hpozcd2SJH

— Heather Long (@byHeatherLong) July 15, 2024

“This is no longer an overheated economy,” Powell added, stating that the labor market appears to be back in balance. Data supporting these assertions include an increase in the unemployment rate from 3.4 percent last April to 4.1 percent last month, a dip in wage growth, reduced weekly hours, and a rise in long-term unemployment. Interest rates remain steadfast at 5.5 percent, a situation drawing criticism from various quarters. Powell, however, refrained from indicating when rates might be cut, with some Republicans on the panel suggesting any such move before the November elections could seem politically motivated.

Powell’s shift on employment focus

Notably, the high interest rates have broadly impacted the economy. The housing market has been hit hard, with sales of existing homes dropping by over 30 percent since 2021. Many potential first-time buyers and homeowners looking to sell are being restrained by the prohibitive cost of credit. Despite these challenges, it doesn’t necessarily point to an impending recession. However, the sustained high-interest-rate environment is proving detrimental, and its original purpose—cooling the labor market and controlling inflation—may no longer be pertinent. The upcoming Federal Open Market Committee meeting at the end of the month will be crucial. Public statements from Fed governors suggest reluctance to cut rates, although some experts argue it might already be too late to mitigate the mounting risks to employment. Skanda Amarnath, executive director of Employ America, advocates for a rate cut if current economic trends continue. Sen. Van Hollen echoed this sentiment, stressing the greater risk lies in delaying action which could lead to further unemployment increases. The Fed’s independence should compel it to follow the data, irrespective of political considerations.