Federal Reserve Chair Jerome Powell said in an interview that "unexpected weakening" in the labor market could also be a reason for the central bank to act
Federal Reserve Chair Jerome Powell said in an interview that "unexpected weakening" in the labor market could also be a reason for the central bank to act AFP

Federal Reserve Chair Jerome Powell said Monday that recent data boosts the central bank's confidence that inflation is coming down towards its two percent target -- a trend that signals interest rate cuts on the horizon.

"We didn't gain any additional confidence in the first quarter but the three readings in the second quarter, including the one from last week, do add somewhat to confidence," Powell said in an interview with David Rubenstein of the Economic Club of Washington DC.

While the central bank has focused largely on inflation -- which surged in the wake of the pandemic -- it is now also closely monitoring its mandate of promoting maximum employment, Powell added.

"If we were to see an unexpected weakening in the labor market, then that might also be a reason for reaction by us," he said.

To ease demand and cool inflation, the Fed in 2022 rapidly lifted the benchmark lending rate. It has since held rates at a decades-high level in the face of sticky price increases.

But last week a key inflation gauge, the consumer price index, ticked down more than expected, in a positive development for policymakers.

Similar trends, along with a rise in unemployment to the highest level since 2021, could nudge the Fed to reduce rates sooner rather than later.

"I have always felt like there was a pathway to getting inflation back down to our two percent goal on a sustainable basis without the kind of pain in the labor market, kind of high unemployment that has been typical of tightening cycles and getting inflation down," Powell said.

In part, this was because the labor market was "so overheated that it could cool down quite a bit."

He added that a hard landing of the economy, marked by a sharp downturn, would be an unlikely scenario.

The Fed is due to hold its next policy meeting at end-July, and analysts widely expect it could begin cutting interest rates in its September meeting this year.

Responding to the issue of lowering rates during a presidential campaign period, Powell stressed: "We don't take political considerations into account. We don't put up a political filter on our decisions."

He also noted that rates were not likely to return to the low level they were at between the global financial crisis and the pandemic.

On Monday, Powell expressed concern over deficits the country is running as well, saying it was on an "unsustainable path."