Cutting interest rates ‘too late or too little’ could hit jobs, Fed chair warns

Holding interest rates too high for too long would threaten economic growth and jobs, the US Federal Reserve chair, Jerome Powell, warned Congress on Tuesday. “Elevated inflation is not the only risk we face,” said Powell.

During a congressional hearing, Powell signaled that while suppressing inflation remains a priority, policymakers at the Fed are now concentrating on when they choose to cut rates.

The US is “no longer an overheated economy”, Powell said, adding that its job market has “cooled considerably” from its surge after the early damage inflicted by the pandemic.

“We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation,” he told the US Senate banking, housing and urban affairs committee. “At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

The American central bank, which raised interest rates to a two-decade high in a bid to bring down inflation, is now considering its next steps.

While price growth has retreated from its highest levels in a generation, it has remained stubbornly higher than the 2% targeted by Fed officials, amid persisting concerns over the cost of living across the US.

Fed officials are due to convene for their next rate-setting meeting at the end of July. As of last month, most of the central bank’s policymakers expect to cut rates once or twice this year, according to economic projections released by the Fed.

Powell struck a note of optimism on price growth. “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,” he said.

Following this modest progress, Powell added, “more good data” would strengthen the Fed’s confidence “that inflation is moving sustainably” to its 2% goal.