Powell Says He Sees Path where Inflation Cools Without Significant Job Losses

Powell said the labor market is gradually cooling and “that’s what we would want to see.”

Economists say the biggest surprise of the U.S, economy this year has been the continued strength of the labor market despite the Fed’s rapid pace of interest rate hikes over the past 15 months.

On the one hand, economists say the resilient labor market means the Fed’s tightening of monetary policy will result in a “soft landing” or a “mild recession” for the economy.

But other economists worry that the strong labor market could ultimately make it harder to bring down to the central bank’s 2% target.

Harvard economist Jason Furman told the New York Times that there is a “bad scenario” where the unemployment rate will need to rise closer to 10% to get inflation back to target.

The unemployment rate is now 3.7% and Fed officials have forecast that it will rise to 4.5% by the end of 2024.

Democrats on the Senate panel said they supported the Fed’s decision to hold interest rates steady after raising rates at every meeting since last March.

“For the many of us who are concerned that further rate hikes would do more harm than good, it is welcome news,” said Sen. Sherrod Brown, the Democrat from Ohio who is the chairman of the Banking committee.

Powell said a few times that a “strong majority” of Fed officials think the Fed will engineer two more 25 basis point rate hikes by the end of the year. That would bring the Fed’s rate to a range of 5.5%-5.75%.

In response to concerns from Senators, Powell said the Fed “is trying to avoid the mistake of going too far.”

“It only makes sense to move at a careful pace,” Powell added.

On the banking sector, Powell said that the Fed is working with small banks that have a concentration in commercial real estate loans.

“We’re working with banks to work our way through this,” Powell said.

The swift collapse of Silicon Valley Bank earlier in March put a spotlight on potentially painful losses lurking at banks from trillions of dollars in commercial-real-estate loans on their books. Office building valuations have dropped sharply as many Americans continue to work from home.

Republicans on the Senate panel argued the Fed’s plans to raise capital standards on banks in the wake of the bank failures this spring will hurt the banking sector and lead to less lending to businesses.

“My question is how much is too much? And when is enough enough? The higher the capital standards, the lower the capital for the private sector, which means fewer loans and less capital for those who are actually creating jobs,” said Sen. Tim Scott, the ranking Republican on the Banking Committee.

Powell said the Fed has not yet finished work on its plan to raise bank capital. He said he didn’t expect the final version to raise capital standards on banks with less than $100 billion in assets.

Sen. Elizabeth Warren, Democrat from Massachusetts, said she didn’t think Powell was taking enough responsibility for the string of bank failures earlier this year.

In a testy exchange, Powell said he was focused on learning the right lessons so that there is not a repeat of a large bank failure that spreads contagion into the banking system.

“My focus is on going forward,” Powell said.