Federal Reserve Chairman Powell warns that prolonged high interest rates could hinder economic growth

Federal Reserve Chairman Jerome Powell on Tuesday expressed concern about the potential negative effects of keeping interest rates high for an extended period, warning that such a strategy could threaten economic growth.

Speaking at a Senate Banking, Housing, and Urban Affairs Committee hearing in Washington, D.C., Powell set the stage for his two-day appearance on Capitol Hill this week. Despite a recent economic slowdown, Powell noted that the overall economy and labor market remain strong. He also highlighted some progress in reducing inflation, emphasizing the Federal Reserve’s commitment to hitting its 2% inflation target.

“Given the progress we have made in containing inflation and cooling the labor market over the past two years, we must recognize that elevated inflation is not the only risk we face,” Powell said in prepared remarks. “If we inadequately delay or reduce policy tightening, we could unnecessarily weaken economic activity and employment.”

Powell’s remarks come as the Federal Open Market Committee approaches the one-year anniversary of its last interest rate hike. The Fed’s overnight interest rate currently stands at 5.25%-5.50%, its highest level in 23 years, after 11 consecutive increases in response to the highest inflation rates since the early 1980s.

Market expectations suggest that the Fed could begin cutting rates in September, with a potential additional quarter-percentage point cut by the end of the year. However, FOMC members only indicated a rate cut at their June meeting.

“Strengthening our confidence”

Powell and his colleagues have recently expressed optimism about inflation data, which has shown an improvement after a surprising spike earlier this year. The Fed’s preferred inflation metric, the personal consumption expenditures price index, came in at 2.6% in May, down from a peak above 7% in June 2022.

“After a period of stagnation toward our 2 percent inflation target earlier this year, recent monthly readings have shown modest gains,” Powell noted. “Further strong data would bolster our confidence that inflation is moving sustainably toward 2 percent.”

Powell’s statement is part of the Federal Reserve’s semiannual monetary policy update to Congress. After his prepared remarks, Powell will answer questions from the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday.

Powell has historically refrained from making significant policy announcements during these hearings and has handled politically charged questions from committee members. This year’s questions could be especially intense, given the backdrop of a volatile presidential campaign season.

Several Democratic committee members, including the chairman, Sen. Sherrod Brown of Ohio, urged Powell to consider lowering interest rates as soon as possible.

“I am concerned that delaying rate cuts could undo the progress we have made in creating good-paying jobs,” Brown told Powell. “With unemployment rising, we must act now to protect American jobs. Workers stand to lose too much if the Fed overshoots its inflation target and triggers an unnecessary recession.”

Powell, however, reiterated that the Federal Reserve is apolitical and operates independently. He stressed the importance of maintaining “the operational independence necessary” for the Fed to fulfill its mandate.

His additional remarks focused on the broader economic landscape. Despite rising unemployment and declining gross domestic product (GDP) growth, Powell noted that the U.S. economy continues to expand robustly. Both manufacturing and services contracted in June.

Nonetheless, Powell stressed that “private domestic demand remains solid, with consumer spending showing slower but still substantial increases.”