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Slowdown in the labor market could be a sign of upcoming interest rate cut – Press Enterprise
Slowdown in the labor market could be a sign of upcoming interest rate cut – Press Enterprise

Federal Reserve Bank Chairman Jerome Powell speaks during a House Financial Services Committee hearing on the Federal Reserve’s semiannual monetary policy report at the U.S. Capitol in Washington, DC on July 10, 2024. Powell spoke about reducing inflation rates, stating, “The level of U.S. debt is not unsustainable in and of itself, but the path we are on is unsustainable.” (Photo by Bonnie Cash/Getty Images)

By Paul Wiseman | The Associated Press

Federal Reserve Chairman Jerome Powell reiterated the message on Wednesday that the Fed is paying increasing attention to weakening the labor market rather than just containing inflation, a shift in policy that suggests it will likely begin cutting interest rates soon.

“We are not just a central bank that has its sights set on inflation,” Powell said on the second of two days of semi-annual congressional testimony before the House Finance Committee. “We also have an employment mandate.”

Speaking to the Senate Banking Committee on Tuesday, Powell said the Fed had made “significant progress” toward its goal of defeating the worst inflation spike in four decades. He noted that cutting interest rates “too late or too little could unduly weaken economic activity and employment.”

Congress has given the Fed a dual mandate: to keep prices stable and to promote maximum employment.

“We’ve had to focus on the inflation mandate for a long time,” Powell said Wednesday. As the economy emerged from the pandemic-induced recession, inflation hit a four-decade high in mid-2022. The Fed responded by raising its benchmark interest rate 11 times in 2022 and 2023. Since then, inflation has fallen from its peak of 9.1% to 3.3%.

The U.S. economy and labor market have continued to grow, defying widespread predictions that sharply higher borrowing costs resulting from Fed rate hikes would trigger a recession. Still, growth has moderated this year. From April to June, U.S. employers added an average of 177,000 new jobs per month, the lowest hiring rate since January 2021.

Powell told the House committee on Wednesday that to avoid damaging the economy, the Fed is unlikely to wait until inflation reaches its 2 percent target before starting to cut interest rates.

Most economists expect the Fed to make its first interest rate cut in September. Powell declined to comment this week on when he expects the first cut to occur.

Under questioning from several Republican lawmakers, Powell said the Fed and other financial regulators would revise a 2023 proposal known as the “Basel III endgame” that would increase the amount of capital banks must hold to protect against potential losses.

Big banks are aggressively resisting tighter regulations introduced in the wake of the 2007-2008 financial crisis, warning that the stricter rules would force them to restrict lending to consumers and businesses, potentially endangering the economy.

Powell said the three main U.S. banking regulators – the Fed, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency – are close to agreeing on a new version that will be made available for public comment.

By Aurora