Powell’s testimony has rekindled hopes that interest rate cuts are on the way

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key takeaways

  • Chairman Jerome Powell said during testimony to Congress today that the U.S. economy has made “substantial progress” toward the Fed’s 2% inflation target over the past two years.
  • In addition to dampening inflation, a softness in the labor market could potentially influence the Fed’s decision to cut interest rates.
  • The latest inflation data on the Consumer Price Index will be released on Thursday, but it is unlikely to have any impact on what the Fed will vote on interest rates during its meeting at the end of the month.

US Federal Reserve Chairman Jerome Powell said in his testimony to Congress today that the case for cutting interest rates is getting stronger due to low inflation and “considerable cooling” in the labor market.

“This is no longer an overheated economy,” Powell told the Senate Banking Committee as part of his semiannual address to Congress on monetary policy.

Powell said that after going back up in the first quarter of 2024, we have seen “modest” progress in slowing inflation. According to consumer price index data released by the Bureau of Labor Statistics, US consumer prices remained unchanged month on month in May. Annual inflation increased by 3.3%, slightly lower than the 3.4% annual increase in April.

According to Powell, although overall inflation has “decreased considerably” over the past few years, it still remains above the Fed’s 2% target.

Powell’s comments came after the Bureau of Labor Statistics released job numbers last week. Though still low, the unemployment rate rose slightly again to 4.1% in June. The gradual easing of the labor market has led some, including the stock market, to speculate that the Fed could cut interest rates as soon as September.

According to Powell, the committee needs to see sustained improvement in inflation data over the next few months before making any adjustments to the federal funds rate. This means that even if Thursday’s CPI report shows inflation easing again, it is unlikely to change the Federal Open Market Committee’s vote later this month. The Fed is expected to once again keep interest rates at a target rate of 5.25% to 5.5%, the level it has held since July 2023.

Here’s why everyone is trying to interpret Powell’s tea leaves, and what it means for your money.

How can interest rate cuts affect you?

The federal funds rate is the interest rate that banks charge each other to borrow and lend money. When this rate rises, banks also raise rates on consumer products like credit cards and loans, making it more expensive to borrow money. The Fed will raise interest rates in 2022 and 2023 to rein in runaway inflation in the wake of the pandemic.

Even if the Fed votes to cut the federal funds rate in September, it will likely be incremental. An interest rate cut alone is unlikely to reduce your credit card APR by much. So if you have high-interest debt, consider implementing a debt payoff strategy or applying for a balance transfer card or debt consolidation loan.

If you’re waiting for rates to drop to buy a home, experts suggest focusing instead on factors you can control. And while it’s not a buyer’s market in most areas of the country, a slowdown in home sales could present an opportunity to negotiate a lower price with a motivated seller.

Finally, if you’re working on saving more money, take advantage of higher interest rates with a high-yield savings account or high-yield certificate of deposit to grow your savings faster.

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