Powell denies that the US economy is still overheating

“We are very aware that we face risks from two sides” and can no longer focus solely on inflation, Powell told the Senate Banking Committee on Tuesday. “The labor market appears to be fully balanced again.”

Powell bluntly told lawmakers that “I’m not going to send any signals today about the timing of any future action” on interest rates, as Democrats grilled him about risks to the labor market and Republicans questioned him about the pain to households from inflation that remains above the central bank’s 2% target.

However, analysts still see Powell at least opening the door to a rate cut as early as September.

“Their emphasis has shifted a bit toward a balance of risks within the Fed’s mandate,” said Christopher Hodge, chief U.S. economist at Natixis in New York. “The Fed needs to get ahead of labor market weakness… It looks like the groundwork is being laid for a turnaround in September.”

Powell’s semi-annual Senate hearing will be followed by a House hearing scheduled for Wednesday.

While Powell’s opening remarks focused on a review of the economy and monetary policy, questions from senators focused on housing costs and even more on proposed changes to banking regulations that the Federal Reserve is debating internally.

In his prepared remarks, Powell told senators that inflation had been improving in recent months and “more good data would strengthen” the case for looser monetary policy. The Fed has kept its policy rate between 5.25% and 5.5% since July 2023.

Powell’s comments appeared to show growing faith that inflation will return to the central bank’s target, and contrasted the lack of progress in the first months of the year with a recent improvement that has helped bolster the Fed’s confidence that price pressures will continue to slow.

“After a lack of progress toward our 2% inflation objective earlier this year, the most recent monthly readings have shown further modest gains,” Powell said. “More good data would strengthen our confidence that inflation is moving sustainably toward 2%,” he added.