Behind the latest shift in Powell’s rate-cut framework
It didn’t move markets, but during two days of congressional testimony this week, Fed Chair Jerome Powell made the beginning of a pivot on interest rates that might prove more durable than one that sparked a big market rally at the end of last year. Around December, Powell and several colleagues signaled they could begin the process of dialing interest rates down as soon as the middle of the year if inflation, which cooled notably in the second half of last year, continued on that path. When Powell testified on Capitol Hill in March, he allowed that the Fed was “not far" from achieving the confidence it needed to cut rates.
That case for reducing rates, it turned out, had been built on a rickety foundation. When inflation turned up in the first quarter and the economy showed solid growth, the justification for lower rates crumbled. But when Powell returned to Capitol Hill this week, he began laying the groundwork for rate cuts on what could prove to be a stronger footing.
He pointed to how a cooling labor market means a potential source of ongoing, high inflation has diminished. And he suggested that any further softening in the job market might be unnecessary and unwelcome. Striking the balance between ensuring inflation comes back to the Fed’s 2% goal while preventing a sharp rise in layoffs “is the No.
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