Federal Reserve Chair Jerome Powell delivered his semiannual monetary policy report to Congress, emphasizing cautiousness about slashing interest rates and highlighting the Fed's focus on inflation and the job market. In his prepared testimony submitted to congressional lawmakers, Powell stated that the central bank is waiting for "greater confidence" that inflation is sustainably moving towards the target of 2% before considering a reduction in the federal funds rate.

Powell's remarks indicated a departure from his previous comments, as he did not provide a clear indication of when a rate cut might occur. He did acknowledge that recent inflation readings have shown modest progress, suggesting that more positive data would strengthen confidence in the movement towards the target rate.

Appearing before the Senate Banking Committee, Powell acknowledged that the job market in the US is currently "strong, but not overheated," resembling pre-pandemic conditions. However, he voiced concerns about waiting too long to lower rates, potentially putting the progress made in job creation at risk. Senator Sherrod Brown of Ohio, chair of the committee, pointed out this concern, urging the Fed to take action in order to protect job growth.

While the job market remains a strength of the economy, recent indicators have suggested some cooling. The unemployment rate in June rose to 4.1%, the highest level since November 2021. Moreover, new applications for unemployment benefits have seen an upward trend in recent weeks. The narrowing of the gap between job openings and the number of unemployed individuals seeking work further indicates a slight ease in the labor market.

Powell stressed that the Fed recognizes the existence of "two-sided risks," balancing the potential consequences of both resurging inflation and a weakening labor market. The Fed aims to stabilize prices and maximize employment, adjusting its focus depending on prevailing economic circumstances. In recent years, the central bank has prioritized inflation, but that priority has shifted to maintaining a balanced approach.

Consumer spending, a major driver of the US economy, has shown signs of weakness, with sales at retailers consistently falling short of expectations. Retailers have signaled that consumers, across various income levels, are opting for cheaper alternatives. Surveys of service-providing businesses have also indicated subdued consumer demand this summer, in contrast to the spending surge seen last year.

Considering these factors, the recent economic data strengthens the case for the Fed to lower borrowing costs. However, Powell also addressed senators' concerns regarding proposed banking regulations. Powell indicated that a revised proposal for these regulations would likely be submitted for public comment, though the specific changes remained unspecified.

In addition, Senator Elizabeth Warren of Massachusetts pressed Powell on implementing a long-delayed rule that aims to restrain risky behavior linked to executive incentive-based pay on Wall Street. The Fed, along with other regulators, must reach a consensus on implementing this rule, providing a challenge due to intense lobbying efforts.

Powell emphasized that the Fed does not advocate for self-regulation by banks and is committed to implementing rules that promote stability in the financial sector. While the timeline for possible rate cuts remains uncertain, Powell's testimony underscored the Fed's careful approach in balancing inflation concerns and the health of the job market.