Inflation is cooling and a rate cut is coming soon, but continued progress is needed.

[Jeanna, 7-9-2024, The New York Times, “Powell Welcomes Cooling Inflation but Wants ‘More Good Data’ Before Rate Cut,” https://www.nytimes.com/2024/07/09/business/economy/powell-inflation-rate-cut.html, accessed 7-9-24] nikoglenn

Jerome H. Powell, the chair of the Federal Reserve, indicated on Tuesday that recent inflation data had given the central bank more confidence that price increases were returning to normal, and that continued progress along these lines would help to pave the way toward a central bank rate cut.

“The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent,” Mr. Powell said.

He added that data earlier this year failed to provide such confidence, but that recent inflation readings “have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Mr. Powell delivered the remarks on Tuesday in an appearance before the Senate Banking Committee. While Mr. Powell avoided zeroing in on a specific month for when the Fed might begin to cut interest rates, he also did little to push back on growing expectations that a reduction could come in September. Fed officials meet in late July, but few economists expect a move that early.

Mr. Powell said he was “not going to be sending any signals about the timing of any future actions” in response to a lawmaker question about when rate cuts might come.

The chair’s congressional testimony came at a delicate moment for the central bank. Fed officials are trying to figure out when to begin cutting interest rates, which they have held at the highest rate in decades for roughly a year now. But as they weigh that choice, they must strike a careful balance: They want to keep borrowing costs high long enough to cool the economy and fully stamp out rapid inflation, but they also want to avoid overdoing it, which could crash the economy too much and cause a recession.

“If we loosen policy too late or too little, we could hurt economic activity,” Mr. Powell said. “If we loosen policy too much or too soon, then we could undermine the progress on inflation. So we’re very much balancing those two risks, and that’s really the essence of what we’re thinking about these days.”

While Fed officials spent 2022 and much of 2023 focused on beating back inflation, even if that came at an economic cost, price increases have cooled enough that they are now clearly taking the trade-offs between cooling inflation and weakening the labor market into account.

After jumping to 9.1 percent in 2022, Consumer Price Index inflation is expected to fade to 3.1 percent as of a June reading set for release this Thursday. Importantly, prices are now climbing very slowly on a monthly basis, a sign that inflation is coming back under control.

“After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress,” Mr. Powell said.

The inflation slowdown has come in part because supply chains have healed from pandemic-related disruptions, allowing goods prices to fall. But the progress also owes to a continued cooling in the broader economy.