The Federal Reserve's hawkish stance has turned dovish! Powell: Rate cuts coming soon

Federal Reserve Governor Waller said on Wednesday that as long as there are no major surprises in inflation and employment, a rate cut is imminent.

Waller stated in his speech, "I believe the current data is consistent with achieving a soft landing, and I will look for data to support this view in the coming months. Therefore, while I don't think we have reached our final destination yet, I believe we are getting closer to the need for a rate cut."

In line with other policymakers' statements, Waller's remarks suggest that the likelihood of a rate cut at the FOMC meeting later this month is slim, but there is a high probability of a rate cut in September.

In recent months, as data has shown a moderation in inflation after an unexpected rise in the first three months of 2024, Federal Reserve officials have become more optimistic.

Waller outlined three scenarios that could unfold in the coming days: first, more positive inflation data providing a reason for a rate cut in the "near future"; second, data fluctuating but still pointing to a slowdown; and third, inflation rebounding, forcing the Fed to adopt a more hawkish policy stance.

In these three scenarios, he believes the third scenario, where inflation unexpectedly strengthens, is the least likely. Waller said:

"Given that I believe the first two scenarios are the most likely to occur, I believe the timing for a rate cut is approaching."

Waller's comments on Wednesday are particularly noteworthy because he has been one of the most hawkish members of the Federal Reserve's monetary policy committee this year, expressing concerns that inflation may be more persistent than expected.

In May, Waller expected a rate cut to come "a few months later" as he awaited more convincing data to prove that inflation was declining. His remarks on Wednesday indicate that the Federal Reserve is nearing the threshold for a rate cut.

On one hand, he mentioned that the labor market is "in a great place," with wage growth slowing down while employment numbers are expanding. Meanwhile, June CPI inflation fell by 0.1% month-on-month, and core CPI year-on-year slowed to 3.3%, the lowest level since April 2021.

He said, "After disappointing data at the beginning of 2024, we now have several months of data that I believe are more consistent with the progress we saw last year in the continuous decline in inflation, also consistent with the FOMC's price stability target. More and more evidence suggests that the first-quarter inflation data may have been an anomaly, and tight monetary policy has controlled high inflation."

These comments are also consistent with remarks made earlier by the "third in command" of the Federal Reserve, New York Fed President Williams. Williams pointed out, "Inflation data is moving in the right direction and is quite consistent."

As a result, the market once again predicts that the Federal Reserve will adopt a more accommodative policy. The CME Group's FedWatch Tool shows that federal funds futures market traders are betting on a 25 basis point rate cut by the Fed in September and at least one more rate cut before the end of the year