Keeping interest rates high for an extended period may endanger economic expansion, according to Fed Chair Powell.

• On Tuesday, Jerome Powell, the Federal Reserve Chair, voiced worry that prolonged high interest rates could hinder economic expansion.
• If policy restraint is reduced too late or too little, it could negatively impact economic activity and employment, as Powell stated in his remarks on Capitol Hill this week.

On Tuesday, Jerome Powell, the Federal Reserve Chair, voiced worry that prolonged high interest rates could hinder economic expansion.

Despite some recent cooling, the central bank leader said the economy remains strong and the labor market is stable. Powell cited some easing in inflation, which he said policymakers are determined to bring down to their 2% goal.

"While we have made progress in lowering inflation and cooling the labor market, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment."

The Federal Open Market Committee has not raised benchmark interest rates in a year.

The Fed's overnight borrowing rate is currently at its highest level in 23 years, with 11 consecutive hikes following the recent increase in inflation, which has not been seen since the early 1980s.

The Fed is expected to start reducing interest rates in September, with another possible cut by the end of the year, but FOMC members only indicated one cut at their June meeting.

'Strengthen our confidence'

Recent inflation data has been somewhat encouraging after a surprise jump to start the year, as indicated by Powell and his colleagues. Inflation, as measured by the Fed's preferred personal consumption expenditures price index, was at 2.6% in May, down from a peak of over 7% in June 2022.

""Despite slow progress towards our 2 percent inflation target in the first half of the year, recent monthly readings indicate modest advancement. Further good data will enhance our belief that inflation is steadily moving towards 2 percent," Powell stated."

Powell will be questioned by Senate Banking Committee members on Tuesday and House Financial Services Committee members on Wednesday following his semiannual update on monetary policy.

In past appearances, Powell has avoided making dramatic policy announcements while evading politically charged questions from committee members. This year, the questioning may become more contentious as Washington is on high alert amid a volatile presidential campaign.

Powell emphasized the importance of the Fed's operational independence in doing its job, stressing that it does not get involved in taking policy sides outside of its own roles.

The manufacturing and services sectors reported being in contraction during June, while recent data has shown the unemployment rate creeping higher and broad growth as measured by gross domestic product receding.

Despite the deceleration in GDP, Powell stated that the U.S. economy is still expanding at a steady rate.

Despite a slowdown, private domestic demand remains strong, with steady growth in consumer spending, he stated.