(Reuters) – Inflation is easing and the labor market has returned to the “tight but not overheated” situation seen before the COVID-19 pandemic threw the U.S. economy into disarray, the Federal Reserve said on Friday in a congressional report that documented sustainability. the appearance of more normal conditions as a result of the health crisis.
“Inflation eased markedly last year and has shown modest further progress so far this year,” the Fed said in its latest Monetary Policy Report to Congress, noting that in the key area of housing services there was it is likely only a matter of time before the pace of price increases returns to where it was before the health crisis.
The labor market, meanwhile, “continued to rebalance during the first half of this year,” the report noted. “The demand for labor has softened, as job openings have fallen in many sectors of the economy and the supply of labor has continued to increase, supported by a strong pace of immigration.”
“The balance between labor demand and supply looks similar to that in the period immediately before the pandemic, when the labor market was relatively tight but not overheated. Nominal wage growth continued to slow,” the report said.
The twice-yearly report to Congress comes ahead of two days of testimony from Fed Chairman Jerome Powell, set for Tuesday and Wednesday next week, that are likely to focus on the Fed’s plans for monetary policy going forward. in a sensitive election season.
Job growth has slowed and the unemployment rate has risen steadily from 3.5% last July to 4.1% in June. Inflation remains around 2.6% from the Fed’s preferred price index of Personal Consumption Expenditures, still considered “elevated” by policymakers but moving toward a point where it may no longer be.
New inflation data will be released on Thursday, and if price pressures continue to ease, that could prompt Fed officials to at least open the door to interest rate cuts in September — a call that Powell and colleagues his say that it will be based only on the economics of the situation, not how it affects the political prospects of either side.
However, both Democrats and Republicans are likely to question Powell on this very issue.
The Fed at its most recent policy meeting in June left interest rates unchanged from 5.25% to 5.50%, and new forecasts from policymakers showed they had pulled back expectations for a rate cut this year from three to just one. However, financial markets and some policymakers expect the Fed to deliver two cuts of a quarter point each by the end of the year.
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A number of congressional Democrats have already gone after Powell over the high rates, complaining that they are worsening already poor housing affordability for low- and middle-income families. Republicans, meanwhile, have been critical of the Fed’s slow response to inflation and may chastise Powell for any indication he might cut rates ahead of the November election.
(Reporting by Howard Schneider, Ann Saphier and Michael Derby; Editing by Andrea Ricci)
By Howard Schneider
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