By Nick Timiraos 

WASHINGTON -- Federal Reserve Chairman Jerome Powell told lawmakers the central bank saw little need to cut interest rates further after making three reductions between July and October.

"We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market" and stable inflation, said Mr. Powell in testimony to Congress's Joint Economic Committee on Wednesday.

"Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly," he added.

The Fed cut its benchmark interest rate to a range between 1.5% and 1.75% at its policy meeting two weeks ago to cushion the economy against risks of a sharp slowdown from weakening business investment and global growth.

Investors don't expect the Fed to cut rates at its final meeting of the year, on Dec. 10-11, and futures markets estimate a roughly 50% probability of one more rate cut by the middle of next year, according to CME Group.

After an especially active few months for monetary policy, Mr. Powell indicated at a press conference on Oct. 30 that the central bank was comfortable entering a wait-and-see phase.

He largely repeated that message on Wednesday before the committee, which is composed of 10 members each from the Senate and House of Representatives. He also is slated to testify Thursday before the House Budget Committee.

With both short-term interest rates and long-term bond yields much lower than in past economic expansions, Fed officials have highlighted the risk that monetary policy will have less ability to counteract a future downturn. They are in the middle of a review of their policy-setting framework with an eye toward making their tools more potent.

In recent downturns, the Fed has cut its benchmark rate by around 5 percentage points. With the rate now slightly above 1.5%, "we don't have that kind of room" today, said Mr. Powell. "We're too close, closer than we would like, to zero."

As a result, Mr. Powell said lawmakers should be ready for fiscal policy to support the economy in a downturn.

At the same time, he warned that the long-term path of rising budget deficits and a higher debt load are unsustainable, which could "restrain fiscal policy makers' willingness or ability to support economic activity during a downturn."

Fed officials raised short-term interest rates four times last year to guard against undesirable levels of inflation or financial bubbles, but they have cut rates three times since July of this year due to a slowdown in business investment and global growth that has been amplified by the U.S.-China trade war.

The Fed also stopped shrinking its $4 trillion asset portfolio in August and began buying $60 billion a month in short-term Treasury debt to arrest recent volatility in money markets last month. Officials have said the purchases are technical in nature, but they have contributed to lower borrowing costs.

Fed officials have expected annual economic growth to slow to around 2% this year from nearly 3% last year. The question now is whether a contraction in business investment, which fell in the past two quarters, prompts deeper cutbacks in hiring and a downturn in consumer confidence and spending, which has buoyed output this year.

With inflation defying the Fed's forecasts by holding slightly below the central bank's 2% target this year, Mr. Powell said it is possible that Fed policy in recent years was providing less support to the economy than officials expected or that the relationship between job-market slack and inflation had weakened.

"What we have learned...is that the U.S. economy can operate at a much lower rate of unemployment than many would have thought," he said. Officials needed to have significant humility, Mr. Powell added, about the models and forecasts they use to set policy.

Mr. Powell said the economy's baseline outlook remains favorable, in part because of the Fed's recent rate cuts.

He flagged "noteworthy risks" to the Fed's favorable outlook, namely trade policy and sluggish growth abroad.

The U.S.-China trade conflict worsened immediately after the Fed cut rates in July, but the Trump administration took steps last month to put trade talks back on track.

Hopes of a trade truce have buoyed investors' hopes that the economy can avoid a downturn in recent weeks, with stock prices and long-term bond yields rising.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

November 13, 2019 12:29 ET (17:29 GMT)

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