Powell's reasons for signaling a rate cut are mainly as follows:
• Easing inflation pressure: The U.S. inflation rate is steadily falling back to the Fed's 2% target. The Fed's inflation rate indicator shows that the inflation rate has gradually declined from previous high levels, such as the peak of more than 7% in June 2022, to the recent 2.5%, lower than 3.2% a year ago. The reduction in inflationary pressure provides room for monetary policy adjustments, making rate cuts a possible policy option.
• Labor market changes: Although the U.S. unemployment rate recently reached 4.3%, triggering the "Sam's Law" that foreshadows an impending recession, Powell believes that the rise in unemployment is due to more people entering the labor market and slower hiring, rather than increased layoffs or a general deterioration in the labor market. And the labor market has cooled significantly from its previous overheated state. Powell said he does not want or welcome a further cooling of labor market conditions, which means that the downside risk of employment has increased, and monetary policy adjustments are needed to avoid a sharp rise in unemployment in order to achieve the Fed's goal of maintaining a strong labor market.
• Uncertainty in economic outlook: Although the US economy has not yet shown obvious signs of recession, there is a trend of gradual slowdown in economic growth, which may cause concerns about the future economic outlook. In order to cope with potential economic downturn risks, taking interest rate cuts in advance can provide certain support and stimulus to the economy and help stabilize economic growth. For example, the non-farm payrolls data and manufacturing ISM data released by the United States in July were significantly lower than market expectations, and the employment data was significantly revised down before, which increased the uncertainty of the economic outlook.
• Global economic situation and policy coordination: The global economy is interconnected, and the policy direction and economic conditions of other major economies will also have an impact on the United States. If global economic growth faces pressure, or other central banks adopt loose policies such as interest rate cuts, the Federal Reserve may consider adjusting its own policies to adapt to the global economic situation and maintain policy coordination to avoid the United States being at a disadvantage in the global economic landscape.
