The Federal Reserve is likely “within a couple of rate hikes” of its final destination in its quest to rein in inflation, bank chairman Jerome Powell said on Thursday, noting that officials have slowed their pace of monetary-policy tightening in an attempt to “avoid the mistake of going too far.”
“The point of our meeting, last meeting, was really to moderate the pace of our decision making,” Powell told the Senate Banking Committee during his second straight day of testimony on Capitol Hill. Now, he said, “the data will tell...
The Federal Reserve is likely “within a couple of rate hikes” of its final destination in its quest to rein in inflation, bank chairman Jerome Powell said on Thursday, noting that officials have slowed their pace of monetary-policy tightening in an attempt to “avoid the mistake of going too far.”
“The point of our meeting, last meeting, was really to moderate the pace of our decision making,” Powell told the Senate Banking Committee during his second straight day of testimony on Capitol Hill. Now, he said, “the data will tell us what to do.”
Over roughly two hours of testimony, Powell acknowledged that the Fed has made some progress in returning the economy to price stability but emphasized that it has more to do. He noted that while headline inflation had fallen by more than half from its peak, the progress was primarily due to declining prices for energy and food and the resolution of most supply-chain issues, rather than the Fed’s efforts.
“Where monetary policy takes effect is in the service sector,” Powell said. “That’s where we haven’t seen much progress.”
Powell warned, too, that the Fed is likely to keep interest rates elevated for some time, saying the bank doesn’t anticipate cutting rates until officials are convinced inflation is heading down to 2%. While policy makers are currently forecasting some degree of rate cuts by the end of next year, “that’s going to depend on how the economy performs,” he said. “And inflation is just consistently proven more persistent than we’ve expected.”
Powell’s Senate testimony on Thursday came just a day after he told House lawmakers that the Fed still had “a long way to go” in its inflation fight and vowed that the bank wouldn’t waver from its 2% inflation target. The hearings this week were mandated as part of the Fed’s semiannual monetary policy report to Congress.
Some senators on Thursday voiced concerns about the Fed’s expected path forward, given the potential for higher interest rates to force slower economic growth and higher unemployment. In response to comments from Powell about why central bank officials feel they have further tightening to do, Sen. Sherrod Brown, an Ohio Democrat who leads the committee, told the bank chairman: “What Fed governors call cooling down, regular people where I live call layoffs.”
Powell, for his part, was clear-eyed about the potential for at least some greater economic pain. While he agreed with Sen. Catherine Cortez-Masto, a Nevada Democrat, that he continues to see a path where inflation slows without causing significant job losses, he also acknowledged that unemployment will likely have to climb at least somewhat before the Fed’s work is done.
“It’s not a desired objective, but we do expect on this path that the unemployment rate will go up a little further,” he said.
Powell’s appearance was also his first on Capitol Hill since the failure of a series of regional banks this spring. A number of lawmakers pressed him on what sort of regulation the Fed is considering to ensure a similar problem doesn’t happen again. Powell repeatedly noted his support for community banks and suggested that any regulatory changes will be largely focused on implementing new rules for medium and large banks with assets $100 billion and higher.
Capital requirements, he said, will be “very, very skewed” to the eight largest banks, adding that “none of this should affect banks under $100 billion.”
In terms of bank regulation, “we try hard not to do a one-size-fits-all thing,” he said.
Write to Megan Cassella at megan.cassella@dowjones.com