Powell warns prolonged high rates risk economic growth

Powell notes recent inflation easing and highlights the importance of Fed’s operational independence

Powell warns prolonged high rates risk economic growth

Federal Reserve Chair Jerome Powell expressed concern on Tuesday about the potential risk to economic growth from keeping interest rates too high for an extended period, as reported by CNBC.   

Powell's comments set the stage for his two-day appearance on Capitol Hill this week. He highlighted that the economy and labour market remain strong despite some recent cooling. He noted that while inflation has eased, policymakers are determined to bring it down to their 2 percent goal.   

“In light of the progress made in lowering inflation and cooling the labour market over the past two years, elevated inflation is not the only risk we face,” Powell stated in his prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”   

This commentary comes as the one-year anniversary of the last Federal Open Market Committee interest rate hike approaches. The Fed’s overnight borrowing rate is currently at 5.25 to 5.50 percent, the highest in 23 years, following 11 consecutive hikes after inflation reached its highest level since the early 1980s.   

Market expectations suggest the Fed will start cutting rates in September, with another quarter percentage point reduction likely by year-end. However, FOMC members indicated only one cut in their June meeting.   

Powell and his colleagues have recently noted encouraging inflation data following a surprise jump earlier this year. The Fed’s preferred inflation measure, the personal consumption expenditures price index, was at 2.6 percent in May, down from over 7 percent in June 2022.   

Powell remarked, “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. More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”   

These statements are part of the semi-annual updates on monetary policy mandated by Congress. After his remarks, Powell will face questioning from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.   

In past appearances, Powell has avoided making dramatic policy announcements and dodged politically charged questions from committee members. This year’s questioning could become contentious amid a volatile presidential campaign. Several Democratic committee members urged Powell to lower rates soon.   

Sen. Sherrod Brown (D-Ohio), the committee chair, told Powell, “I’m concerned that if the Fed waits too long to lower rates, the Fed could undo the progress we’ve made on creating good-paying jobs. If unemployment trends upward, you must act immediately to protect Americans' jobs. Workers have too much to lose if the Fed overshoots its inflation target and causes a completely unnecessary recession.”   

Powell has stressed that the Fed remains apolitical and does not take policy sides outside its roles. He emphasized the importance of “the operational independence that is needed” for the Fed to function effectively.  

Powell’s other remarks focused on policy stance relative to the broader economy. Recent data showed rising unemployment rates and receding broad growth as measured by GDP. Both the manufacturing and services sectors reported contractions in June.   

Despite the GDP deceleration, Powell noted, “The US economy continues to expand at a solid pace. Private domestic demand remains robust, with slower but still-solid increases in consumer spending.”