The Federal Reserve has sent out the strongest "interest rate cut" signal so far. Is the September interest rate cut a done deal?
In public appearances this week, including at two congressional hearings by Powell, Fed officials spoke with unprecedented confidence about their control over inflation and their readiness to shift monetary policy.
Supporting their confidence are better-than-expected economic data, which showed this week that inflationary pressures continued to decline, with core CPI growth hitting a three-year low, while the labor market also weakened. In addition, Bank of America warned that low-income customers are showing signs of financial stress after a long period of high prices.
While the Fed did not specify when and by how much it would lower borrowing costs, their comments made it clear that rate cuts were coming. Traders and economists widely expect the first rate cut to come in September.
Chicago Federal Reserve Bank President Goolsbee said on Friday that it was a "good week" for the central bank, which has been aiming to reduce inflation without triggering a recession. Goolsbee added:
The fall in inflation means that real interest rates are now more restrictive, and we only want to keep them that way for as long as necessary. If not, it would be appropriate to return to more normal conditions.
The Fed has kept its benchmark policy rate at a 23-year high of 5.25%-5.5% since July last year.
Earlier this week, Powell testified in Congress that "considerable progress" has been made in curbing price pressures, and the labor market has shown clear signs of cooling, so the Fed no longer has to focus on inflation. Instead, the Fed faces "two-way risks" and must be more vigilant about high interest rates to avoid excessive deterioration in the job market.
Federal Reserve Governor Lisa Cook also emphasized this point in her speech this week:
She said the Fed was "very concerned" about changes in the unemployment rate and would "be responsive."
San Francisco Federal Reserve Bank President Mary Daly said in an interview later this week:
A rate cut would be justified. You hear a lot of us, especially Chairman Powell, talking about how important the labor market is, and that's a pretty big communication signal.
The Fed is trying to achieve a "soft landing," where inflation falls back to its target without a sharp rise in unemployment. That outcome depends on whether the Fed starts easing policy soon and lowers its policy rate to closer to 3% over time, said Priya Misra, an analyst at JPMorgan Asset Management.
Jonathan Pingle, who previously worked at the Federal Reserve and is now chief economist at UBS, added that the economy is indeed slowing and the labor market appears to be slowing as a result. At some point, they will hope that the slowdown stops and stabilizes, but the risk is that the economy will continue to slow.