Fed Chair Jerome Powell, in his semiannual testimony to the Senate Banking Committee yesterday, commented that a further cooling in inflation would be an undesirable outcome from the perspective of monetary policymakers, suggesting that the Fed is closer to a rate cut than it is to another rate hike as some market participants had feared. Elaborating further, the Fed Chair highlighted that the labor market has cooled down significantly on many measures, a clear sign that the Fed’s restrictive policy decisions have made a meaningful impact on inflation. Mr. Powell, however, confirmed that the FOMC will not be aggressively moving to an accommodative monetary policy in the coming months to avoid creating another inflation spike.

A Note About Rate Cuts

In December 2023, Fed officials predicted three 0.25% rate cuts for 2024, and the first rate cut was expected in June. These projections proved to be wrong as the Fed was forced to hold rates steady in both March and June, and policymakers now expect only one rate cut this year. There are several reasons behind this change in the Fed’s stance. Inflation has continued to hover well over the Fed’s long-term target of 2% this year and consumer spending remained strong in the first half of the year as well. The labor market, until last month, was showing no major signs of cooling either. This surprising resilience of the economy was the main factor that forced the Fed to hold off interest rate cuts for longer.

Zooming Out

The recent remarks of Fed Chair Jerome Powell suggest that a rate cut is looming on the horizon as he admitted that a further cooling of the labor market would be detrimental to the health of the economy. He also claimed yesterday that the U.S. economy is no longer overheated, bolstering the prospects for a rate cut as soon as September. According to CME FedWatch, investors are now factoring in a 70% chance for a rate cut in September compared to 50% as of early June. Peter Cardillo, Chief Market Economist at Spartan Capital, revealed yesterday that the Fed may cut rates twice this year – in September and December – taking investors by surprise. The upcoming release of June consumer price data tomorrow will give a better indication of the rate cut probability in September.