Fed Chairman Powell will make a public speech in the early hours of Tuesday Beijing time. The market expects Fed officials to assess the slowdown in inflation this week and consider whether to signal a rate cut.

The Federal Reserve will hold an interest rate meeting on July 30-31. According to Fed rules, policymakers cannot comment on monetary policy from July 20 (this Saturday) to the Friday after the meeting.

With inflation creeping toward their 2% target and concerns growing about whether the labor market can remain strong as the Fed tightens economic policy, they may use their final days to signal that rate cuts are coming or explain why recent data still does not support a shift to easier monetary policy.

"We expect the Fed to send a clear signal in July that rate cuts will begin at the upcoming meeting, with a possible cut in September if the economy develops as expected," Citi analysts said on Friday.

According to CME's FedWatch tool, weak inflation data in June prompted investors to raise the probability of a Fed rate cut in September to more than 90%, while some large banks and investment institutions also adjusted their rate cut expectations in advance.

Markets do not expect policymakers to cut their benchmark interest rate at their upcoming July meeting from the 5.25% to 5.5% range they have maintained since July 2023. But recent soft inflation reports could prompt them to change the language in their policy statements to signal a rate cut could be on the way at their next meeting in September, and officials' comments this week will be carefully parsed to see how the latest data affects policymakers' views.

The U.S. CPI data continued to slow in June, while the PPI data released last Friday showed that price pressures in areas such as medical care eased, further providing a basis for looser monetary policy.

“Enough good data?”

Powell told U.S. lawmakers last week that “more good data” would pave the way for lower borrowing costs, but he would not hint at a specific timeline.

However, his congressional testimony came ahead of the CPI data, which will be released on July 26, as well as the PPI data, which has economists estimating that the PCE price index used by the Fed to set its inflation target fell below 2.5% in June from 2.6% in May. The June PCE price index is due on July 26.

Powell and other Fed officials have said they want to start cutting rates before inflation actually reaches 2% because it takes time for the effects of monetary policy to filter through the economy. They worry that waiting too long could keep interest rates too high and slow economic growth too much.

This week, Fed Governor Kugler will speak on Wednesday, Governor Waller will attend an event later Wednesday, and the Fed's third-ranking official, New York Fed President Williams, will speak on monetary policy on Friday.

The comments may be particularly noteworthy from Waller, who is seen as a hawk but has recently argued, based on his own research, that the labor market is at a point where further weakness could lead to a rapid rise in unemployment.

Fed officials believe that the cooling of the labor market so far has been absorbed mainly by companies' reduction in job openings due to strong post-pandemic demand for goods and services. However, the unemployment rate has steadily increased. In June, the unemployment rate exceeded 4% for the first time, when 4.1% of people seeking work did not find one.

In late May, Waller said he still wanted to see "a few more months of good inflation data" before backing a rate cut, and on Wednesday he will have a chance to lay out how much progress he thinks has been made.

Since he last spoke about monetary policy, the PCE price index has fallen to 2.6% from 2.7% in May and is expected to fall further. If incoming data, including the second quarter PCE annualized rate, continue to show a moderation in price pressures, the Fed may change its long-standing "inflation remains high" language in its next statement, which many economists believe needs to be revised to open the door to rate cuts. The president of the Chicago Fed said earlier:

“The more data you get that you see inflation coming down closer to target, similar to what we had last week ... the more confidence you have that inflation is on track to move back to 2%.”

The article is forwarded from: Jinshi Data