Powell has said: We have significant housing issues in the country

The U.S. is "no longer an overheated economy" with a job market that has cooled from its pandemic-era extremes and is, in many ways, back to where it was before the health crisis, Fed Chair Jerome Powell told Congress, indicating that the case for interest rate cuts is becoming stronger.

"We are well aware that we now face two-sided risks," and can no longer focus solely on inflation, Powell said to the Senate Banking Committee on Tuesday. "The labor market appears to be fully back in balance."

Powell emphasized that he did not want "to be sending any signals about the timing of any future actions" on interest rates, aligning with his recent efforts to focus more on the evolution of economic data and the possible choices the Fed might make in response, rather than providing firm guidance on what might happen and when.

However, with the Nov. 5 presidential election approaching and only two scheduled Fed meetings before it, Powell faced questions from Democrats about the risks to the job market of not cutting rates soon, and from Republicans about the impact on households of inflation that remains above the central bank's 2% target.

"Any move to lower rates before Nov. 5 would be a bad perception," Senator Kevin Cramer, Republican of North Dakota, told Powell, also pledging support for central bank independence.

Several moments in the hearing, explicitly or not, were framed by the presidential vote, the political sensitivity of upcoming Fed decisions, and suggestions by some close to Republican candidate and former President Donald Trump that the Fed should be under tighter political oversight—a counter to widely accepted norms.

Throughout the hearing, Powell emphasized the importance of Fed independence in rate setting and his intent to stick with data-based decision-making.

His stance, analysts noted, seemed to at least open the door to a rate cut as soon as September.

"His emphasis has shifted a bit towards a balance of risks within the Fed’s mandate," said Christopher Hodge, chief economist for the U.S. at Natixis in New York. "The Fed needs to get ahead of weakness in the labor market...It appears as if the foundation is being laid for a pivot in September."

Powell's semiannual appearance in the Senate will be followed by a hearing in the House scheduled for Wednesday at 10 a.m. EDT (1400 GMT).

While Powell's opening remarks focused on a review of the economy and monetary policy, senators' questions highlighted housing costs and proposed changes in bank regulations that the Fed is currently debating internally.