Howard Schneider
(Reuters) – Inflation is easing and the job market has returned to the “tense however not overheated” situations it was in earlier than the COVID-19 pandemic despatched the U.S. economic system into disarray, the Federal Reserve stated in a report back to Congress on Friday. After the well being disaster, issues are steadily returning to regular.
“Inflation slowed considerably final yr and has made modest additional progress to date this yr,” the Fed stated in its newest financial coverage report back to Congress, noting that in the important thing space of housing companies, it might be only a matter of time earlier than inflation slows. Positive aspects fell again to pre-health disaster ranges.
On the similar time, the report famous that the job market “continued to rebalance within the first half of the yr.” “Labor demand has eased as job vacancies fell in lots of sectors of the economic system, whereas labor provide continues to extend, supported by a powerful tempo of immigration.”
“The stability between labor provide and demand seems to be just like the pre-pandemic interval, when the labor market was comparatively tight however not overheated. Nominal wage progress continues to sluggish,” the report states.
The twice-yearly report back to Congress comes forward of two days of testimony by Fed Chairman Jerome Powell scheduled for subsequent Tuesday and Wednesday, which is prone to give attention to the Fed’s financial coverage plans heading right into a delicate election season.
Job progress has been slowing, with the unemployment price rising steadily from 3.5% in July final yr to 4.1% as of June. Inflation stays round 2.6%, in accordance with the Fed’s most well-liked private consumption expenditures worth index, which policymakers nonetheless view as “excessive” however approaching a stage which will not be so.
New inflation information can be launched on Thursday, and if worth pressures proceed to ease, it may immediate Fed officers to open the door to reducing rates of interest at the very least in September – a choice that Powell and colleagues stated can be primarily based solely on financial situations. slightly than the way it impacts both social gathering’s political prospects forward of the November elections.
coverage independence
In a potential nod to present political sensitivities — together with hypothesis that Republican presidential candidate Donald Trump, if he wins, might attempt to oust Powell earlier than his time period ends in 2026 — the report lists him as ” “Particular Theme One” is a brief article entitled “Financial Coverage Independence, Transparency and Accountability”.
The message: The Fed is accountable first to Congress, which supplies the central financial institution “operational independence” in precisely setting rates of interest in order that these selections are “free from short-term political affect.”
“There’s widespread settlement that in the long term, financial coverage actions to maximise employment and worth stability are prone to contain restrictive measures that impose short-term financial prices, whereas actions that improve output and employment to unsustainable ranges haven’t any long-term sensible implications. profit.
Nevertheless, each Democrats and Republicans are prone to ask Powell throughout two days of testimony whether or not the Fed is adhering to that customary.
The Federal Reserve stored rates of interest unchanged at 5.25% to five.50% at its most up-to-date coverage assembly in June, and policymakers’ newest forecasts present that they’ve lowered their expectations for price cuts this yr from three to at least one. Nevertheless, monetary markets and a few policymakers nonetheless count on the Fed to chop rates of interest twice earlier than the top of the yr, every by 1 / 4 of a proportion level.
Some congressional Democrats have attacked Powell over excessive rates of interest, complaining that they worsen housing affordability for low- and middle-income households. Republicans, in the meantime, have been important of the Fed’s preliminary sluggish response to inflation and are prone to chastise Powell for any signal that he would possibly minimize rates of interest earlier than the election.
However whether or not the speed cuts start now or later, that second could also be coming.
Actually, in a chart now included within the report, a number of financial coverage guidelines counsel a price minimize is overdue, particularly on the urging of Republican lawmakers.
“The present provisions of those guidelines are near or under the present goal vary for the federal funds price,” the report famous in discussing the completely different variations of the Taylor rule used to set the Fed’s benchmark coverage price.