Federal Reserve Chairman Jerome Powell said Monday the last three inflation reports have bolstered the Fed’s confidence that inflation is moving toward the 2% target, which is the key condition for policymakers to initiate interest rate cuts.

“We’re back to a place where inflation is no longer overheated,” Powell said during an interview with David Rubenstein at the Economic Club of Washington.

Q2 Inflation Data Encourages Fed Chair

While the first quarter showed no progress toward the 2% inflation goal, the second quarter provided more favorable data, Powell said: “We’ve had now three better readings. And if you average them, it’s a pretty good pace.”

He reiterated the Fed’s dual mandate of managing both inflation and employment, indicating that economic conditions now allow for a better balance between the two.

Powell hinted that unexpected labor market issues could also prompt the Fed to lower rates.

The Role Of Policy Lag In Rate Cut Timing

Citing Milton Friedman‘s study on monetary policy lag, Powell suggested the Fed doesn’t need to wait until inflation hits 2% before cutting rates. “If the Fed waits for inflation to get to 2% to cut, it has waited too long,” he said, noting that existing tightening measures are likely to push inflation below 2%.

He added that recent positive inflation data increases the Fed’s confidence in reaching the 2% target: “Lately, we have been getting some of that.”

When asked about market-implied probabilities of a 90% chance of a September rate cut, Powell emphasized the Fed would make decisions on a meeting-by-meeting basis, relying on evolving data and outlooks.

Powell Says No Hard Landing Necessary

Powell dismissed concerns of a “hard landing” for the U.S. economy, stating: “I have always felt that there was a path to lower inflation without the kind of labor market pain that has been typical of past tightening cycles.”

On the potential for interest rates to return to pre-COVID lows, Powell indicated a higher neutral rate in the future. “Our funds rate is 5.3% roughly. And it feels like it’s restrictive but not severely restrictive. So it tells me that the neutral rate must have risen.”

Concerns Over US Debt

When Rubenstein highlighted the bleak environment of $35 trillion in outstanding government debt and an annual addition of $1.6 to $2 trillion, the Fed chair’s reaction was clear: “I am very worried over time about the deficits that we’re running,” he said.

Powell emphasized that while it’s not the Fed’s role to advise Congress, the debt path is unsustainable. “We really need to get to work on that. I would hope this is a top-line issue for elected officials, whose job it is, not ours.”

Market Reactions

Stocks slightly weakened during Powell’s speech, with the S&P 500, tracked by the SPDR S&P 500 ETF Trust ( SPY ) , marginally easing from prior all-time peaks hit during the morning session.

Powell’s remarks, particularly those on the U.S. debt sustainability issue, triggered a rise in long-dated Treasury yields. The 10-year yield rose 5 basis points to 4.24% and the 30-year yield jumped to 4.45%. The popular iShares 20+ Year Treasury Bond ETF ( TLT ) fell 1.2%.

These moves in yields weighed on gold, which trimmed session gains, while adding some strength to the U.S. dollar. Sector-wise, energy stocks, as tracked by the Energy Select Sector SPDR Fund ( XLE ) , maintained their outperformance for the session, rising 1.9%.

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