Powell takes the lead! Will the Fed's first rate cut in September be confirmed this week?

Early Tuesday Beijing time, Federal Reserve Chairman Powell will deliver a public speech. The market expects Fed officials to assess the slowdown in inflation this week and consider whether to signal a rate cut.

The Fed will hold a monetary policy meeting on July 30th and 31st. According to Fed regulations, policymakers cannot comment on monetary policy from July 20th (this Saturday) to the Friday after the meeting.

As inflation approaches the 2% target and concerns about whether the labor market can remain strong under Fed tightening, they may use the last few days to hint at an upcoming rate cut or explain why recent data still does not support a shift to looser monetary policy.

Citigroup analysts stated last Friday, "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."

According to the CME FedWatch Tool, weak inflation data in June has raised investors' probability of a rate cut in September to over 90%, and some large banks and investment institutions have adjusted their rate cut expectations in advance.

The market expects policymakers at the upcoming July meeting not to lower the benchmark interest rate from the range of 5.25% to 5.5% maintained since July 2023. However, recent weak inflation reports may prompt them to change the wording in the policy statement to suggest a rate cut at the next meeting in September. Officials' comments this week will be carefully analyzed to understand how the latest data affects policymakers' views.

U.S. CPI data continued to slow in June, and the PPI data released last Friday showed easing price pressures in sectors such as healthcare, 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 lowering borrowing costs, but he did not indicate a specific timetable.

However, his congressional testimony was made before the CPI and PPI data, with the latter leading economists to estimate that the PCE price index used by the Fed to set inflation targets fell below 2.5% in June from 2.6% in May. The June PCE price index will be released on July 26th.

Powell and other Fed officials have expressed that they want to start cutting rates before inflation actually reaches 2% because the effects of monetary policy take time to transmit to the economy. They are concerned that waiting too long may keep rates too high, leading to slow economic growth.

This week, Fed Governor Quarles will speak on Wednesday, Governor Waller will participate in an event later on Wednesday, and New York Fed President Williams will speak on monetary policy on Friday.

Waller's speech may be particularly noteworthy as he is seen as a hawk, but recently his own research has indicated that the labor market is in a stage where further weakness could lead to a rapid increase in the unemployment rate. Federal Reserve officials believe that, so far, the cooling of the labor market has mainly been absorbed through a reduction in job vacancies due to strong demand for goods and services by businesses after the epidemic. However, the unemployment rate has been steadily rising. In June, the unemployment rate exceeded 4% for the first time, with 4.1% of job seekers unable to find work at that time.

At the end of May, Powell stated that he still wanted to see "several more months of good inflation data" before supporting a rate cut, and on Wednesday, he will have the opportunity to explain how much progress he believes has been made.

Since his last discussion of monetary policy, the PCE price index has dropped from 2.7% in May to 2.6%, with further declines expected. If upcoming data, including the initial estimate of the second-quarter PCE annual rate, continues to show easing price pressures, the Fed may change the wording it has long used in its next statement that "inflation remains high," many economists believe this wording needs to be modified to open the door to rate cuts. Chicago Fed President Evans stated earlier:

"You will see the inflation rate drop to near the target level, similar to the more data we received last week... the more confident you are that inflation is moving back towards 2%."