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The U.S. central bank is moving closer to cutting interest rates after price pressures declined for three straight months, its president said.
Jerome Powell said policy makers are more confident that inflation will return to their 2% target, adding that officials will not wait until price increases return to that level before cutting borrowing costs.
Although Powell was reluctant to reveal the timing of a rate cut, he said the economy is now in a “more balanced state.”
“Our long-standing test is that we want greater confidence that inflation will continue to decline toward our 2 percent objective,” Powell said in a speech to the Economic Club of Washington. “What increases that confidence is more good inflation data. We’ve had some of that data lately.”
The Fed’s preferred inflation measure eased in June and is now at 2.6%.
Powell said the last three rounds of inflation data have reinforced the belief of the interest rate-setting Federal Open Market Committee that the economy is cooling and there are signs that the U.S. job market “has indeed cooled.”
The Fed’s mission is to both control inflation and support full employment.
Powell said that after a long commitment to curbing inflation (raising interest rates to a 23-year high of 5.25% to 5.5%), policymakers are now more focused on supporting the economy.
“We’re looking at both scenarios,” he said. “They’re much better balanced. Which means if we see a surprising weakening in the labor market, that’s probably why we’re reacting as well.”
Asked whether the Fed was likely to cut rates by September, as investors are betting, Powell declined to comment.
However, he said: “We have made it very clear that we are not going to wait until inflation gets to 2% before we cut interest rates.”
Powell also warned that the “worrying” growth in U.S. debt is “unsustainable” and will need to be addressed by either Donald Trump or Joe Biden after the November election.
The independent Congressional Budget Office warned that U.S. borrowing is likely to remain around 6% of GDP in the coming years.
“I’m very concerned about our chronic deficits…We’re running large deficits in a context of full employment and healthy growth, and that’s not sustainable over the long term, and we really need to work on that,” Powell said.
“I hope this is a top concern for elected officials … I do talk to quite a few elected officials in Congress, and I think there is a growing awareness that it’s time to do something about this.”
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