Powell warns high interest rates could harm economic growth

Fed Chair Jerome Powell expresses concern about prolonged high rates impacting economic growth

Powell warns high interest rates could harm economic growth

Federal Reserve Chair Jerome Powell on Tuesday expressed concern that maintaining high interest rates for too long could harm economic growth, according to CNBC.

As he prepared for a two-day appearance on Capitol Hill, Powell noted the economy's strength and the labour market's resilience, despite some recent cooling. He highlighted some easing in inflation and reiterated the Fed's commitment to reducing it to their 2 percent target.

“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 said in prepared remarks. “Reducing policy restraint too late or too little could unduly weaken economic activity and employment.”

This commentary comes close to the one-year mark since the Federal Open Market Committee last raised benchmark interest rates.

Currently, the Fed’s overnight borrowing rate ranges from 5.25 percent to 5.50 percent, the highest in 23 years, following 11 consecutive hikes due to inflation reaching its highest level since the early 1980s.

Markets anticipate the Fed will start cutting rates in September, with another quarter percentage point reduction likely by year-end. However, FOMC members at their June meeting suggested just one cut.

Recently, Powell and his colleagues have found the inflation data somewhat encouraging after an unexpected rise earlier this year.

In May, inflation measured by the Fed’s preferred personal consumption expenditures price index was at 2.6 percent, down from its peak of over 7 percent in June 2022.

“After a lack of progress towards our 2 percent inflation objective early this year, recent monthly readings have shown modest further progress,” Powell said. “More good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.”

Powell’s statement is part of the congressionally mandated semiannual updates on monetary policy. After delivering his remarks, he will face questions from Senate Banking Committee members on Tuesday and the House Financial Services Committee on Wednesday.

In past appearances, Powell has avoided making dramatic policy announcements and navigated politically charged questions from committee members. This year, the questioning could become contentious, as Washington remains tense amid a volatile presidential campaign.

Several Democratic committee members urged Powell to lower rates soon.

Sen. Sherrod Brown (D-Ohio), the committee chair, expressed concern, saying, “If the Fed waits too long to lower rates, it 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 an unnecessary recession.”

Powell emphasized the Fed's apolitical stance, stating the importance of “the operational independence that is needed” for the Fed to fulfill its role.

He focused on policy in relation to the broader economy, noting that recent data shows the unemployment rate creeping higher and GDP growth slowing. Both the manufacturing and services sectors reported contractions in June.

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