Federal Reserve Chairman Jerome Powell, testifying for a second day before Congress, said Thursday that the economy is in a “very good place” despite headwinds and that the Fed is prepared to do what it can to “keep it there.”
Powell’s comments before the Senate Banking Committee strengthened the message he had sent to a House panel Wednesday that the central bank is prepared to cut interest rates to support economic growth.
Powell noted that economic worries, reflected in surveys of business confidence, rose sharply in May. He did not specify what had caused the shock. But in early May trade talks between the United States and China broke down, and President Donald Trump announced that he was doubling tariffs on $250 billion in Chinese goods.
At the same time, the global economy showed further weakness. Powell said these added threats were addressed by the Fed at its June meeting. Since then, job creation, which had slowed sharply in May, has rebounded and fears of a widening U.S.-China trade war have eased.
While Powell didn’t specifically state that a rate cut could be coming at the July meeting, investors have taken his two days of testimony as strong evidence that it will occur.
In his Senate appearance, Powell elaborated on the Fed’s concerns about persistently low inflation as a reason that there is growing support for rate cuts, citing the problems Japan and Europe are facing in fighting chronically low inflation.
The Fed seeks to keep prices rising at an annual rate of 2%, but it has lagged below that level for most of the current expansion. This year it has fallen farther below that goal.
“You don’t want to get behind the curve and let inflation drop well below 2% because what happens is you get into this unhealthy dynamic potentially where lower expected inflation gets baked into interest rates,” Powell said.
Meanwhile, Thomas I. Barkin, president of the Federal Reserve Bank of Richmond, said in a speech in Idaho on Thursday that “with inflation, there isn’t much case for stepping on the brakes. With unemployment so low and consumer spending so healthy, it’s equally hard to make a case for stepping on the gas.”
But, Barkin said, “I don’t see the current levels of inflation or inflation expectations as a trigger for additional accommodation. The potential to use rate changes to alter firms’ settled routines is small, and the potential cost of overreaching, as I outlined earlier, feels real.”
Barkin is not a voting member of the Federal Open Market Committee this year. He was in 2018.