Home Economics Fed Chair Jerome Powell: “Two-Sided Risks” to Interest Rate Decisions

Fed Chair Jerome Powell: “Two-Sided Risks” to Interest Rate Decisions

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Key points

  • Fed Chair Jerome Powell testified before the Senate Banking Committee on Tuesday
  • Most of the discussion was centered on the path of interest rates
  • Powell was non-committal on when the Fed would act to lower rates, but cited the "two-sided risks" involved

Interest rates were a primary topic in the Federal Reserve Chair address before the U.S. Senate on Tuesday

The US Central Bank must exercise caution and be wary of the “two-sided risk” of tweaking interest rates, Federal Reserve chair Jerome Powell told Congress during a speech on Tuesday.

Speaking before the Senate Committee on Banking, Housing, and Urban Affairs as part of his semiannual address on monetary policy, Powell did not veer from past statements about the Fed’s stance on interest rates, instead emphasizing the sensitivity of such a policy decision.

“We are well aware that we now face two-sided risks, and we have for some time,” said Powell.

“We know that if we loosen policy too late or too little, we could hurt economic activity. If we loosen policy too much or too soon, then we can undermine the progress on inflation. So, we’re very much balancing those two risks,” Powell said.

A cooling labor market

What Powell described has become more evident now that the labor market has cooled considerably. According to July figures, the unemployment rate is up to 4.1%.

This is further evidence that the Fed has to ensure the labor market remains strong in addition to bringing inflation down.

“We know that if we loosen policy too late or too little, it could hamper the economy,” said Powell.

“And if the Fed moves too quickly to lower rates, it could result in a loss of progress in bringing inflation down to the 2% goal.

Powell added that inflation has been moving toward its 2% goal, with the latest Personal Consumption Expenditures (PCE) reading at 2.6%.

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

“Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys […] of households, as well as measures from financial markets.”

Looking for more “good data”

The Fed chair also said the Federal Open Market Committee (FOMC) will not reduce the federal funds rate until it has “greater confidence” that inflation is moving sustainably toward 2%, arguing that “more good data” is needed.

Senate Banking Committee chair Sen. Sherrod Brown (D-OH) reminded Powell that higher interest rates make borrowing more expensive for families.

“Every month that the Fed keeps rates high, it costs Americans more money,” Brown said.

“Exceptional” U.S. economy

While Powell would not indicate when the Fed will act on rates, he did say that it probably won’t be an increase.

“If you look at the last Summary of Projections, it doesn’t seem likely that next policy move would be a rate increase,” he said, adding that it is important to “loosen policy at the right moment”.

Finally, in response to a question from Sen. Jon Tester (D-OH), Powell extolled the virtues of an independent central bank, free of politics or extraneous influence.

“All advanced economies have a policy of operational independence,” said Powell. “It is a good institutional arrangement that serves the public well.”

Powell was also asked about the performance of the U.S. economy compared to other advanced economies around the globe.

“I’m in lots and lots of international discussions as part of my job and the story for the last two years has been how exceptional the performance of the US economy has been and that’s not a secret.

“Clearly the US economy has performed very well compared to our advanced economy colleagues.”

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Senior News Writer

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