Nick Timiraos, a reporter from the Wall Street Journal known as the "new Fed news agency", wrote that Federal Reserve Chairman Powell said on Tuesday that further cooling of the labor market may not be desirable, this subtle but important change brings the Federal Reserve one step closer to a rate cut.

Powell told the Senate Banking Committee on Tuesday during its two-day hearing, "Rising inflation is not the only risk we face. We have seen a clear cooling in the labor market in many ways. This is not the source of the current general inflation pressure on the economy."

Timiraos said this assessment is noteworthy because Federal Reserve officials have long believed that an overheating labor market was the main risk to inflationary pressures.

Powell acknowledged that just two months ago he would not have made such a judgment--in fact, the Fed leader's comments were more cautious at a conference in Portugal last week before the U.S. Department of Labor released its non-farm payroll report for June.

Behind the shift in outlook is labor market data showing a slowdown in hiring, with the proportion of Americans looking for work growing moderately but steadily as labor force participation increases, partly due to immigration.

This year, the U.S. economy has continued to add an average of more than 200,000 jobs per month. But last week's report showed that the unemployment rate rose slightly from 3.7% in December to 4.1% in January. Powell said the job market was roughly where it was before the outbreak, when it was "strong, but not overheated."

Meanwhile, according to the Fed's preferred indicator, inflation fell to 2.6% in May, down from 4% a year ago, but still above the Fed's target of 2%.

The Fed has raised interest rates at its fastest pace in 40 years in 2022 and 2023 to combat inflation, which has risen to its highest level in 40 years. Officials have kept the benchmark rate between 5.25% and 5.5% since July of last year, the highest level in more than 20 years.

Last year, Fed officials were highly focused on high inflation. They did not have to worry too much about the trade-off between raising rates to combat inflation and rising unemployment, as businesses rushed to fill vacant positions in the aftermath of the epidemic.

Now officials are trying to balance the risks of a slowdown in rate cuts and action that is too fast. While the current layoff rate is low, layoffs often rise rapidly as the economy weakens, which is a reason to oppose keeping rates too high. However, cutting rates too early could stimulate economic activity and keep inflation above the Fed's target.

Powell said, "For a long time, the risk of not achieving our inflation target has been greater." He said the risk of allowing inflation to remain too high and allowing the labor market to slow excessively is tending to balance more and more. "We are very clear that we are now facing bilateral risks."

Although Powell has hinted in almost all of his comments that this is a question of when, not whether, the Fed will cut rates, he has repeatedly refused lawmakers' requests to pin down an exact timing. "I won't signal anything about future actions," he said.

Economic forecasts released last month showed that most Fed officials expect one to two rate cuts this year if inflation slows and economic growth remains strong but overheated. Their next meeting will be held on July 30-31. The focus of the market is whether this meeting will send a stronger hint about a rate cut in September.

In the second half of last year, despite strong spending and hiring, prices fell so fast that officials were surprised, prompting them to shift their attention from how high to raise interest rates to how long they would have to wait to cut them if inflation slowed. Powell last appeared before lawmakers in early March, when he indicated that if price growth slowed, the Fed would be able to cut rates before June. But such plans were thrown into disarray as inflation picked up in the first quarter.

Finally, Timiraos noted that violent fluctuations in inflation have left the Fed in an awkward position of watching and waiting, with policymakers either waiting for convincing evidence of mild inflation data for several months or waiting for clear evidence of weak employment and economic activity before cutting rates. When asked if he was more worried about a sharp rise in the unemployment rate, Powell said, "Of course I am worried, even more than I was in March."

Editor/Somer