U.S. Federal Reserve Chair Jerome Powell is doubling down on a probable shift towards cutting interest rates this year. With only two weeks left before the next FOMC meeting and the popular post-meeting statement, he has been using public appearances to foreshadow the next policy move should current trends remain intact.
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Earlier this week, Powell participated in a fireside chat-style discussion at the Economic Club of Washington, D.C. Powell was not shy when describing recent economic data as encouraging.
Positive Inflation Readings
During the discussion, Powell highlighted three consecutive positive inflation readings and explained why they are important to him. “We’ve had three better readings, and if you average them, that’s a pretty good pace,” he stated. He suggested that the tide seemed to turn the most after the most recent Consumer Price Index (CPI) report, which showed a monthly price decrease for the first time in over four years.
Powell made clear that the Fed wouldn’t ease policy until it is confident that inflation is sustainably returning to 2%. He clarified why he was not confident earlier in 2024, “We didn’t gain any additional confidence in the first quarter, but the three readings in the second quarter do add somewhat to confidence.”
Cooling Labor Market
There are additional considerations to the rising probability that the Fed will cut rates during 2024. Another key factor beginning to weigh on the Fed Chair is the cooling labor market. June saw 206,000 jobs added, with the unemployment rate rising to 4.1%. Powell noted the labor market is back to pre-pandemic levels, which aligns better with the Fed’s dual mandate of price stability and maximum employment. “So we’re back to that place, no longer overheated,” Powell said.
Investors Are Anticipating a Rate Cut
Investors are now anticipating a rate cut. The Fed has maintained its target range of 5.25% to 5.50% since last July. According to CME Group data, there’s a 90% chance of a quarter-rate cut in September, with more cuts expected in November and December.
Powell emphasized the importance of timing in adjusting rates. Moving too soon or too late could have serious economic consequences. Cutting rates too early might reverse inflation progress, while waiting too long could slow the economy and spike unemployment.
Powell suggested the Fed can now take a more forward-looking approach. “The Fed can now afford to be a little bit more forward-looking and say it’s not just about the day-to-day, but thinking about what could happen the next three to six months,” he said.
Key Takeaway – A Careful Balancing Act
Powell’s most recent public chat was very candid for a Fed Chair. He indicated a rising likelihood of cutting interest rates, driven by positive economic data and a cooling labor market. This shift reflects a careful balancing act to manage inflation and employment effectively, with timing being crucial to avoid economic disruptions. Investors should watch for further signals as the Fed’s next meeting approaches on July 30-31.
