Powell gives rate cut a "booster shot": Won't wait for inflation to drop to 2% before cutting rates

Federal Reserve Chairman Jerome Powell said that the economic data in the second quarter has given policymakers greater confidence that inflation is heading towards the 2% target, which may pave the way for a recent interest rate cut.

Powell emphasized three recent inflation readings, but made it clear that he did not intend to provide any specific information on the timing of the rate cut. He also reinforced the shift in tone emphasizing potential risks in the labor market and the Fed's continued focus on price suppression.

Speaking at the Economic Club of Washington DC on Monday local time, Powell said in an interview with David Rubenstein, "We didn't gain any additional confidence in the first quarter, but the three readings in the second quarter, including last week's reading, did increase confidence to some extent."

Powell said, "Now that inflation has fallen back and the labor market has indeed cooled, we will consider both tasks at the same time. Their balance is better now."

He hinted that the Fed will not wait for inflation to reach 2% before cutting rates. Powell mentioned that the role of central bank policy has "long and variable lags," explaining why the Fed will not wait for the target to be achieved. Powell said, "This means that if you wait for inflation to keep falling to 2%, you may have waited too long, because the tightening policy you are taking, or the degree of your tightening, is still having an impact, which may keep inflation below 2%." Powell said, on the contrary, the Fed is seeking "greater confidence" that inflation will return to the 2% level.

Powell also stated that he believes a "hard landing" for the U.S. economy is "not a likely scenario."

For about a year, the Fed has kept borrowing costs at their highest level in over two decades as the central bank tries to bring inflation down to the 2% target. Officials aim to further slow the pace of price growth without causing excessive damage to the job market, which has performed well so far despite high borrowing costs. However, recently, the unemployment rate has gradually risen to its highest level since 2021, while broader labor market indicators have also shown other signs of weakness. These trends, along with improving inflation data, support the Fed's soon start to lower its key policy rate.

Powell believes that compared to the early stages of the recovery after the COVID-19 pandemic, the labor market is "no longer overheated," and that "unexpected weakness" could be a reason for the Fed to react.

Interest Rate Outlook

The Federal Open Market Committee (FOMC) will hold its next meeting on July 30-31, with the Fed expected to keep rates steady at this meeting. Traders are betting on at least two rate cuts by the end of 2024, starting in September.

Kathy Bostjancic, Chief Economist at Nationwide Mutual Insurance Co, said, "My feeling is that we really need to get unfavorable readings to deviate from the track of a 25 basis point rate cut in September." "They want to really suppress inflation, but people are increasingly realizing that if they go too far, they may face the risk of economic recession."

The Federal Reserve has the dual mandate of promoting price stability and maximizing employment, but the surge in price pressures in 2021 has shifted policymakers' focus to fighting inflation. In recent weeks, this information has changed, with some officials including Powell emphasizing that concerns about rising inflation and unemployment are now more balanced.

Powell said on Monday, "We want to get this right." Powell also said last week while testifying before Congress that inflation is not the only risk facing the economy.

When asked about the potential market reaction to the attempted assassination of former U.S. President Trump at a rally in Pennsylvania last Saturday, Powell condemned the violent incident, calling it a "very sad day" for America, and expressed relief that Trump was not more seriously injured. He refused to discuss the impact on the markets. He said, "Political violence has no place in our country. I condemn it in the strongest terms."

Neutral interest rates have risen

Powell also mentioned the so-called neutral interest rate on Monday, a concept that describes the Fed's policy stance that neither promotes nor restricts economic growth.

He said that compared to the periods of the 2008-2009 financial crisis and the COVID-19 pandemic, the neutral interest rate may have risen.

Powell said, "In my view, the neutral interest rate may be higher than the levels during the crisis, so rates will be higher." He pointed out that the current policy feels "restrictive" but not "severely restrictive."

When asked about the Fed's independence, he reiterated the Fed's commitment to avoiding political factors in policy-making.

Regarding his term, Powell stated that he intends to complete his term as Fed Chair ending in 2026, but refused to disclose whether he would continue in office if reappointed.

"Fed Megaphone": Powell's speech does not change expectations of "stand pat" in August

The "Fed Megaphone" Nick Timiraos wrote in his latest article that Fed Chair Powell stated on Monday that recent inflation and economic slowdown broadly align with the Fed's expectations, but he still refused to indicate whether there is reason for the Fed to cut rates at the August policy meeting. Powell said, "I won't send any signals about any specific meeting. We will make these decisions meeting by meeting." The inflation report released last week showed overall economic improvement, prompting some private analysts to question whether the Fed needs to wait until September to cut rates.

It is worth noting that the Fed led by Powell typically avoids surprising the market with short-term policy decisions, so from this perspective, Powell's remarks on Monday did not change expectations that the Fed will maintain rate stability at the August meeting.

Timiraos also noted that despite Powell outlining economic prospects in several public appearances over the past two weeks, his speech on Monday at the Economic Club of Washington, D.C. had two important reasons. Powell's speech on Monday was his first speech since the mild June inflation data was released last week, and it was also his last speech before the Fed's July policy meeting blackout period The quiet period will start this Saturday