Federal Reserve Chair Jerome Powell told Congress Tuesday the labor market "has cooled really significantly across so many measures," a development economists say could make the central bank more likely to lower interest rates soon.
Yet, Powell added, "I'm today not going to be sending any signal about the timing of future action."
Powell, speaking before the Senate banking committee, noted several times the central bank faces more balanced risks between slicing rates too soon and reigniting inflation, and waiting too long and weakening the economy and job market. The Fed's mandates are to achieve stable prices and maximum employment.
"We see the two mandates more in balance than they were a year ago," he said. "We need to be focused on both."
In a note to clients, Ryan Sweet, chief U.S. economist at Oxford Economics, said the testimony provides "further evidence that the central bank is moving closer to cutting interest rates." He added the research firm is "increasingly confident" the Fed will begin lowering rates at a mid-September meeting.
In his prepared testimony, Powell struck a cautious tone, repeating that officials don’t expect to cut interest rates until they’ve “gained greater confidence that inflation is moving sustainably toward” the central bank’s 2% goal.
And although the unemployment rate edged up to 4.1% in June - highest since November 2021 - from 4% in May and 3.7% early in the year, Powell said the rate “was still at a low level.”
“Labor market conditions have cooled while remaining strong,” Powell said.
Several Democrats urged Powell to move quickly to cut rates to ensure the labor market and economy don't falter. Some Republicans said the Fed should ensure inflation has been stamped out before acting and should be mindful of the political implications of reducing rates shortly before a presidential election.
"I'm concerned if the Fed waits too long to lower rates, the Fed could undo the progress we've made in creating good jobs," Sen. Sherrod Brown, D-Ohio, told Powell.
How is the current labor market?
A report Friday revealed the economy created a robust new 206,000 jobs in June but the private sector added just 136,000 and totals for the previous two months were revised down sharply. The average 146,000 positions businesses generated over the last three months amount to the weakest performance since early 2021, noted Ian Shepherdson, chief economist of Pantheon Macroeconomics.
Annual wage growth, which feeds into inflation, dipped from 4.1% to 3.9%, the slowest pace in three years.
“The key danger now is that the rise in unemployment becomes self-sustaining, as consumers become more cautious and businesses no longer fear of being unable to rehire if they lay off underutilized workers,” Shepherdson wrote in a note to clients.