Powell: US Economy No Longer Overheated But Faces Risks

Facts

Speaking before the Senate Banking Committee on Tuesday, Federal Reserve chair Jerome Powell said the US economy is no longer 'overheated' thanks to a cooling labor market, but warned of 'two-sided risks' that could threaten economic strength.¹
This comes as the Fed has primarily focused on bringing rampant inflation down to its target rate of 2% and cooling a hot labor market for the past two years, with the federal funds rate at 5.25%-5.50% since July 2023.²
Interest rates at near-40-year highs have helped bring the Fed’s preferred measure of inflation, the personal consumption expenditures index, down to 2.6% in May from above 7% in June 2022.³
Powell warned that economic risks such as weakened economic activity and unemployment could emerge if policy restraints were eased 'too late or too little' — and lowering rates too soon could 'stall or even reverse' progress on inflation.⁴
With only two policymaking meetings before the Nov. 5 election, Powell faced questions from Senate Democrats concerned that maintaining high rates could increase unemployment. He also fielded inquiries from Republicans who oppose lowering rates while inflation remains above 2%.¹
Though hinting that rate reductions may come this year, with investors expecting a rate cut in September, Powell has insisted on basing his decision on the latest economic data as the unemployment rate has risen in recent months.¹

Pro-establishment narrative, as provided by Morningstar. As the US continues to make progress on inflation, it seems like the Fed may finally be willing to cut interest rates in the near future. Consumer prices have cooled significantly over the past two years, and the economy is essentially back to pre-pandemic norms in many regards. Patience has paid off, and with a few more months of positive developments, rates may fall. Various factors are always at play, but the US has essentially overcome its biggest obstacle in inflation.
Establishment-critical narrative, as provided by Bloomberg. Despite nominal progress on inflation, the Fed is essentially playing whack-a-mole when it comes to managing economic risks. While down significantly from record levels, inflation remains well above the 2% target, and the US is on the brink of major economic stagnation and increased unemployment. Powell must balance consumer prices with the dangers of weakened economic activity. The US economy seems to take one step forward and two steps back.