In testimony before the Senate Banking Committee, Fed Chairman Jerome Powell kept the Fed’s options open regarding when the central bank will cut interest rates, something markets believe will likely happen in September. He told senators that he does not expect a hike to be the next step, but declined to give a timetable for the cuts. “I’m not going to send any signals about the timing of future actions.”

The Chairman stressed that monetary policy carries two risks: acting too soon or acting too late. Repeatedly highlighting the danger to both of the Fed’s mandates, full employment and price stability, Powell put a September rate cut on the table, although he was not fully committed to doing so. The Fed will make its decisions “meeting by meeting,” he said.

Recent inflation data have shown a moderate advance, he said, and more positive data would bolster the Fed’s confidence that inflation will return to 2%, a condition for cutting rates. Unanticipated weakness in the labor market could also prompt a cut, Powell added. While the U.S. economy and labor market are slowing, the unemployment rate remains low by historical standards and the U.S. economy is the best in the world, Powell said.

Asked separately about a plan to increase capital requirements for the largest banks, Powell indicated that the Fed and other regulators are one step away from finalizing changes to the proposal released in July 2023 and would likely have to solicit public comment on the revised plan before finalizing it. Powell said it “may be right” that we end up with a final rule in early 2025.

Market response was subdued as Powell sought to give no near-term signal on monetary policy. Stocks brushed record highs as Wall Street assessed the Fed chief’s economic statements as balanced. However, Treasuries struggled to gain traction as some traders positioned themselves in expectation of stronger signals of monetary policy easing. 

Yields on 10-year Treasuries rose during the Chairman’s statement. Futures markets are predicting rate cuts of 50 basis points by the end of December, the first of which will be in September, according to CME’s FedWatch tool.